VAT, or Value Added Tax, is a consumption tax charged on most goods and services sold in the UK. The standard rate is 20%. VAT-registered businesses add VAT to what they sell (output VAT) and can reclaim the VAT they pay on business purchases (input VAT). They pay HMRC the difference between the two, so VAT is ultimately borne by the final consumer rather than the business.

When do I have to register for VAT?

You must register for VAT once your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed it in the next 30 days. This threshold rose to £90,000 in April 2024 and remains £90,000 for 2025/26. You can also register voluntarily below the threshold, which lets you reclaim input VAT but means charging VAT on your sales.

What are the different VAT rates in the UK?

There are three main rates. The standard rate of 20% applies to most goods and services. The reduced rate of 5% applies to items such as domestic gas and electricity, children's car seats and some energy-saving materials. The zero rate of 0% applies to most food, children's clothing, books and newspapers. Some supplies are exempt (for example insurance and certain financial services), which is different from being zero-rated.

Does a sole trader have to charge VAT?

Only if registered. A sole trader must register and charge VAT once their VAT-taxable turnover exceeds £90,000 in a rolling 12-month period. Below that they can choose to register voluntarily, but otherwise they neither charge VAT on sales nor reclaim it on purchases. Many small sole traders stay below the threshold deliberately.

What is the difference between zero-rated and VAT-exempt?

Zero-rated supplies are taxable at a 0% VAT rate, so the business charges no VAT but can still reclaim input VAT on related costs. Exempt supplies are outside the VAT system entirely; the business charges no VAT and cannot reclaim input VAT on costs relating to those sales. Most food is zero-rated, while insurance is exempt.

Can I reclaim the VAT I pay on business purchases?

If you are VAT-registered, yes. You can reclaim the input VAT on goods and services bought for your business, subject to the normal rules (the purchase must be for business use and you need a valid VAT invoice). You then offset that against the output VAT you have charged, paying HMRC only the net difference.

What happens if I go over the VAT threshold?

You must register for VAT within 30 days of the end of the month in which your rolling 12-month turnover exceeded £90,000, and start charging VAT from your effective registration date. Missing the deadline can lead to penalties and being liable for the VAT you should have charged, so monitoring your rolling turnover as you approach the threshold is important.

What Is VAT? Value Added Tax Definition

VAT is the tax almost nobody notices and everybody pays. It is baked into the price of your coffee, your phone contract and your new boots, quietly adding 20% that you hand over without a second thought. For businesses it is a different story entirely: cross a single turnover line and you are conscripted into collecting VAT for HMRC, charging it on every sale and filing returns. Understanding when that line is crossed, and how the tax flows, is essential for any growing sole trader.

Key takeaways

VAT is a consumption tax on most UK goods and services, standard rate 20%.
Businesses must register once VAT-taxable turnover exceeds £90,000 in a rolling 12-month period (2025/26).
Registered businesses charge output VAT on sales and reclaim input VAT on purchases, paying HMRC the difference.
Reduced rate (5%) and zero rate (0%) apply to specific categories like domestic fuel and most food.
VAT returns are filed under Making Tax Digital for VAT using compatible software.

How VAT Actually Flows

VAT is collected in stages along the supply chain, but the burden lands on the final consumer. A VAT-registered business does two things:

It charges output VAT on the goods and services it sells.
It reclaims input VAT on the goods and services it buys for the business.

Each VAT period, the business pays HMRC the difference: output VAT collected minus input VAT reclaimed. If it has paid more VAT than it charged (common for businesses making large purchases or zero-rated sales), HMRC refunds the difference. The net effect is that the tax is passed down the chain and ultimately paid by the end customer, who cannot reclaim it.

Output and input VAT: Output VAT is the VAT a business charges on its sales; input VAT is the VAT it pays on its purchases. The business pays HMRC the output VAT less the input VAT it can reclaim.

The Registration Threshold

You must register for VAT once your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, not a fixed tax year, or if you expect to breach it within the next 30 days. That threshold rose from £85,000 to £90,000 in April 2024 and stays at £90,000 for 2025/26. The deregistration threshold is £88,000.

Below £90,000 you can still register voluntarily. That can make sense if you sell mostly to other VAT-registered businesses (who can reclaim the VAT you charge) and you incur significant input VAT you would like to reclaim. It rarely helps if you sell to the public, since adding 20% effectively raises your prices. The threshold is important enough to have its own detailed entry on the VAT threshold.

The UK VAT Rates

Rate	Percentage	Examples
Standard	20%	Most goods and services
Reduced	5%	Domestic gas and electricity, children's car seats, some energy-saving materials
Zero	0%	Most food, children's clothing, books, newspapers, public transport
Exempt	n/a	Insurance, certain financial services, some education and health services

Zero-rated and exempt are easy to confuse but are not the same. Zero-rated sales are taxable at 0%, so the business can still reclaim input VAT on related purchases. Exempt sales are outside VAT altogether, and a business making only exempt supplies cannot register or reclaim input VAT.

A Worked Example for 2025/26

Take Nadia, who runs a VAT-registered furniture-making business. In a quarter she sells £30,000 of furniture and buys £8,000 of timber and materials, all at the standard rate.

Step	Amount
Sales (net)	£30,000
Output VAT charged at 20%	£6,000
Purchases (net)	£8,000
Input VAT paid at 20%	£1,600
VAT due to HMRC (output minus input)	£4,400

Nadia collected £6,000 of VAT from her customers and paid £1,600 of VAT to her suppliers, so she sends HMRC the £4,400 difference. She has not paid VAT out of her own pocket; she has simply collected it on HMRC's behalf and reclaimed what she paid along the way. The VAT calculator handles adding and removing VAT and working out what you owe, and our blog explains the VAT schemes (Flat Rate, Cash Accounting) that can simplify things for smaller firms.

VAT and Making Tax Digital

VAT was the first tax to go fully digital. Since April 2022, all VAT-registered businesses must keep digital records and file VAT returns through MTD-compatible software, regardless of turnover. This pre-dates the income-tax version of Making Tax Digital arriving for sole traders in April 2026, but the principle is identical: maintain digital records, connect them by digital links, and submit through approved software rather than re-typing figures into a portal. If you are already VAT-registered, you have effectively had a preview of how MTD for Income Tax will feel.

A VAT-registered business is really an unpaid tax collector: it charges VAT on sales, reclaims it on purchases, and hands HMRC the difference.

TapTax, UK tax glossary

What Is VAT? Value Added Tax Definition

How VAT Actually Flows

The Registration Threshold

The UK VAT Rates

A Worked Example for 2025/26

VAT and Making Tax Digital

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