How UK VAT Works

VAT (Value Added Tax) is a consumption tax applied at each stage of the supply chain, ultimately paid by the end consumer. UK businesses with taxable turnover above £90,000 in any rolling 12-month period must register and charge VAT on their supplies. The standard rate is 20% — that's what applies to most goods and services. A reduced 5% rate covers a small list including domestic energy and children's car seats. A zero rate (0%) covers most food, children's clothing, books, newspapers and e-books. All three rates are unchanged for 2026/27 and confirmed unchanged at Spring Statement 2026.

Adding VAT (forward calculation)

If you have a net price and need the gross (VAT-inclusive) figure, multiply by 1 + rate. At 20%, that's × 1.20: a £500 net job invoice becomes £600 gross (£500 net + £100 VAT). At 5%, multiply by 1.05. The calculator's "Add VAT" mode handles this. Use this when you're quoting a customer or working out what to charge.

Removing VAT (reverse calculation)

If you have a gross (VAT-inclusive) price and need to extract the VAT and net, divide by 1 + rate. The shortcuts are worth memorising: at 20%, VAT equals gross × 1/6 (so £120 gross has £20 VAT and £100 net). At 5%, VAT equals gross × 1/21. Use "Remove VAT" mode when you're processing a supplier invoice that doesn't break out the VAT, or working backwards from a customer price to your net revenue.

Registration and the Flat Rate Scheme

The £90,000 registration threshold is calculated on a rolling 12-month basis, not a tax-year basis — once your taxable turnover crosses £90,000 looking back over any 12-month period, you must register within 30 days. There's also a forward-look test: if you expect to exceed £90,000 in the next 30 days alone, register immediately. The deregistration threshold is £88,000. Small businesses under £150,000 turnover can use the Flat Rate Scheme to simplify VAT accounting, paying HMRC a single percentage of gross turnover rather than tracking input and output VAT separately.

Zero-rated vs exempt — a real difference

A common source of confusion. Zero-rated supplies (most food, children's clothing, books, newspapers, e-books) are technically taxable but at 0% — a zero-rated business can reclaim input VAT on its purchases. Exempt supplies (insurance, financial services, healthcare, education, postage) sit outside the VAT system entirely — an exempt business cannot reclaim its input VAT, so the VAT on its purchases becomes a real cost to the business. Same effect on the customer (no VAT charged), very different effect on the supplier's margins.