The short answer
- To add 20% VAT, multiply the price by 1.2. £100 becomes £120.
- To remove 20% VAT, divide by 1.2. £120 becomes £100.
- The VAT inside a VAT-inclusive price is one-sixth of it at 20%, and one twenty-first at 5%.
- You must register once your taxable sales pass £90,000 in any rolling 12 months.
How to add VAT
VAT is charged on the price before VAT, often called the net price. Multiply the net price by one plus the rate.
- Net price£100.00
- VAT£100 × 20%£20.00
At the reduced rate, multiply by 1.05: £100 becomes £105. Zero-rated goods have nothing added, but they are still VAT sales, which matters for registration and reclaiming VAT on costs.
How to remove VAT
Taking VAT out of a gross price is the step that catches most people. The VAT was added on top of the net price, so you have to divide to reverse it. Taking 20% off does not work.
- Gross price
- £120.00
- ÷ 1.2
- £100.00 net
- VAT
- £20.00
- Gross price
- £120.00
- − 20%
- £96.00
- Error
- £4.00 too little
A quicker way to find just the VAT is the VAT fraction. At 20%, VAT is 20/120, or one-sixth, of any VAT-inclusive price. At 5% it is 5/105, or one twenty-first.
| Price including VAT | Price before VAT | VAT (one-sixth) |
|---|---|---|
| £12.00 | £10.00 | £2.00 |
| £59.99 | £49.99 | £10.00 |
| £120.00 | £100.00 | £20.00 |
| £1,000.00 | £833.33 | £166.67 |
Which rate applies
The UK has three VAT rates, and some things are exempt or outside VAT altogether. The rate depends on what is being sold, not on who is selling it.
| Rate | Examples |
|---|---|
| Standard 20% | Most goods and services: clothing for adults, electronics, alcohol, restaurant meals, professional services |
| Reduced 5% | Home energy, children's car seats, mobility aids for older people, some energy-saving installations |
| Zero 0% | Most food, books and newspapers, children's clothes and shoes, public transport, new homes |
| Exempt | Most insurance, finance, education, health services, postage stamps, residential rent |
| Outside the scope | Wages, statutory fees such as the congestion charge, MOT test fees, donations with nothing in return |
Food is the classic grey area. Most food is zero-rated, but confectionery, crisps, alcohol, hot takeaway food and anything eaten on the premises are standard-rated. HMRC publishes detailed notices for each sector; check the relevant one if you are not sure.
Zero-rated is not the same as exempt
Zero-rated sales count towards the registration threshold, and you can reclaim VAT on the costs of making them. Exempt sales do neither. A business that only makes exempt sales cannot register for VAT.
When you must register
You must register for VAT if your taxable turnover (standard, reduced and zero-rated sales, but not exempt ones) goes over £90,000 in any rolling 12-month period. It is not based on your tax year or your accounting year: check it at the end of every month.
- Month endAdd up the last 12 months
If taxable sales are over £90,000, you have gone over the threshold.
- Within 30 daysRegister with HMRC
You have 30 days from the end of the month you went over.
- Next month but oneStart charging VAT
Your registration takes effect from the first day of the second month after you went over.
There is also a forward-looking test: if you expect to go over £90,000 in the next 30 days alone, you must register straight away. Registering late does not get you out of the VAT: HMRC will ask for it from the date you should have registered, whether or not you charged it, plus a penalty.
Voluntary registration
You can register below the threshold. It tends to help when:
- your customers are VAT-registered businesses, who can reclaim the VAT you charge;
- you have significant costs with VAT on them, such as equipment, stock or a van;
- you make mainly zero-rated sales, so you can reclaim VAT on costs without charging any.
It tends to hurt when you sell mainly to the public, because they cannot reclaim VAT. Either your prices rise by up to a fifth or your margin falls. A £50 item that stays at £50 on the shelf earns you only £41.67 once you are registered.
You can ask to deregister if your taxable turnover falls below £88,000 and you expect it to stay there.
How VAT works for a business
A VAT-registered business acts as a collector. On each return it works out two figures:
- Output tax: the VAT it charged customers.
- Input tax: the VAT it paid on business costs.
It pays HMRC the difference. If input tax is bigger, HMRC pays the business.
- Sales before VAT£30,000
- Output tax charged at 20%£6,000
- Costs before VAT£6,000
- Input tax paid at 20%−£1,200
In effect, VAT is charged on the value each business adds, and the final consumer, who cannot reclaim it, bears the whole tax. That is why VAT is not a cost for most registered businesses, and why you leave it out when you work out your margin.
VAT invoices and rounding
Once registered, you must give a VAT invoice to VAT-registered customers. A full VAT invoice shows:
- a unique invoice number, the invoice date and the time of supply (tax point) if different;
- your business name, address and VAT registration number;
- the customer’s name and address;
- a description of each item, the quantity, the unit price before VAT and the VAT rate;
- the total before VAT, the total VAT and any discount.
For sales of £250 or less including VAT, a simplified invoice is enough: it can show the total including VAT and the rate, without a separate VAT figure.
Rounding
You can work out VAT on the invoice total or on each line, then round to the nearest penny. Three items at £3.99 including VAT contain £1.995 of VAT in total, or 66.5p each, so the two methods can differ by a penny. HMRC accepts either if you use it consistently. The calculator works out VAT on the total, as most invoicing software does.
What you can and cannot reclaim
You can reclaim VAT on goods and services you buy for your business, as long as you have a valid VAT invoice and the costs relate to taxable sales.
| Cost | Can you reclaim the VAT? |
|---|---|
| Stock, materials and equipment | Yes |
| Software, phone and broadband for the business | Yes, the business share |
| A van used for the business | Yes |
| A car | Usually not, unless it is used only for business, such as a taxi or driving school car |
| Fuel | Yes for business mileage; private fuel needs a fuel scale charge or apportioning |
| Entertaining clients | No |
| Staff entertaining, such as a party | Yes |
| Costs for exempt sales | No, or only partly |
When you first register, you can reclaim VAT on goods you still have that you bought in the four years before, and on services bought in the six months before, if they were for the business.
VAT accounting schemes
Smaller businesses can choose a scheme that makes VAT easier to manage:
| Scheme | Join if taxable turnover is up to | What it does |
|---|---|---|
| Cash accounting | £1.35 million | Pay VAT when customers pay you, not when you invoice. Helps cash flow if customers pay late. |
| Annual accounting | £1.35 million | One return a year, with advance payments through the year. |
| Flat Rate Scheme | £150,000 | Pay a fixed percentage of your VAT-inclusive turnover instead of working out input and output VAT. |
The Flat Rate Scheme suits some small service businesses with few costs, but the 16.5% rate for limited cost traders often removes the saving. The Flat Rate VAT calculator compares it with standard accounting on your own figures.
Returns, deadlines and penalties
Most businesses file a VAT return every quarter through Making Tax Digital compatible software. The return and the payment are both due one calendar month and seven days after the end of the quarter. For a quarter ending 31 March, that is 7 May.
Late returns and late payments are dealt with separately:
- Late returns earn a penalty point. Once you reach the threshold, four points for quarterly filers, you get a £200 penalty, and another for each further late return.
- Late payments attract a penalty of 3% of the VAT still unpaid after 15 days, a further 3% if it is still unpaid after 30 days, then a daily penalty at 10% a year. Interest is charged on top at the Bank of England base rate plus 4%.
Ask before the deadline
If you cannot pay in full, contact HMRC before the payment is due. Agreeing a Time to Pay arrangement can stop late payment penalties building up.
Rate traps to watch for
Most businesses only ever charge the standard rate. If you sell food, children’s goods or anything to do with energy or buildings, the rate can depend on small details. A few that regularly cause problems:
- Hot food and eating in. Cold takeaway food such as a sandwich is usually zero-rated. The same sandwich toasted, or eaten at a table on your premises, is standard-rated.
- Snacks and treats. Cakes and most biscuits are zero-rated; chocolate-covered biscuits, sweets and crisps are standard-rated.
- Children’s clothes. Zero-rated only if designed for young children and within size limits. Larger sizes are standard-rated even if a child wears them.
- Building work. Most repairs and extensions are standard-rated, but building a new home is zero-rated and some conversions and energy-saving installations get 5% or 0%.
- Mixed supplies. A gift hamper with food and wine, or a magazine sold with a toy, may need the price split between rates.
Getting the rate wrong usually costs the seller, not the customer: if you charge 0% on something that should carry 20%, HMRC treats the VAT as included in what you were paid. On a £120 sale, that is £20 out of your own pocket.
Records and Making Tax Digital
Every VAT-registered business must follow Making Tax Digital for VAT. That means keeping VAT records in software, or in spreadsheets linked to software, and sending returns to HMRC through it. You cannot file on the old HMRC online form.
The digital records must include, for each sale and purchase:
- the date, the value before VAT and the VAT rate charged;
- for purchases, the VAT you are reclaiming;
- any adjustments, such as corrections to earlier returns.
Keep VAT records and invoices for at least six years. If HMRC checks a return, it will ask to see the invoices behind your input tax claims, so a missing purchase invoice can mean losing the VAT on it.