How VAT works in the UK

What VAT is

Value Added Tax (VAT) is a tax on most goods and services sold in the UK. Businesses that are VAT-registered charge it to their customers and pass it on to HMRC, after deducting the VAT they paid on their own business purchases.

The three rates

GOV.UK publishes three rates:

• Standard rate: 20% for most goods and services.
• Reduced rate: 5% for some goods and services, for example home energy and children's car seats.
• Zero rate: 0% for items such as most food and children's clothes. Zero-rated supplies are still VAT-taxable supplies, at 0%.

Some supplies are exempt from VAT altogether, for example postage stamps and some financial and property transactions. Exempt is different from zero-rated.

Adding VAT to a net price

Multiply the net price by 1 plus the rate. At the standard rate that is multiplying by 1.2.

£250 net × 1.20 = £300 gross, of which £50 is VAT.

Removing VAT from a gross price

Divide the gross price by 1 plus the rate. At the standard rate that is dividing by 1.2.

£300 gross ÷ 1.20 = £250 net, so the VAT is £50.

A common mistake is to take 20% off the gross price. That removes too much, because 20% of £300 is £60, not £50.

Check the official source

Which rate applies depends on exactly what is being supplied, and rules change. Always confirm against GOV.UK: VAT rates or ask a qualified adviser.

You can try the numbers with our UK VAT Calculator.