VAT — Value Added Tax — is a consumption tax charged on most goods and services in the UK. It is collected by businesses on behalf of HMRC and ultimately paid by the end consumer.

VAT is charged at each stage of the supply chain. Each business charges VAT on sales (output tax) and reclaims VAT on purchases (input tax). Only the difference is paid to HMRC. The full burden falls on the final consumer who cannot reclaim it.

You must register if your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed this in the next 30 days alone. Voluntary registration is also possible below this threshold.

Most businesses submit quarterly VAT returns to HMRC. Since April 2022, all VAT-registered businesses must use Making Tax Digital (MTD) compliant software — such as Xero, QuickBooks, FreeAgent or Sage.

All UK VAT rates explained

Current threshold: £90,000 in any rolling 12-month period. Once exceeded you have 30 days to register. Deregistration threshold: £88,000.

Flat Rate % by sector (2026)

Whether you're a freelancer raising an invoice or a business owner quoting a client — knowing how to add and remove VAT correctly is essential. This guide explains exactly how to do it, with worked examples.

To add VAT at the UK standard rate of 20%, multiply the net price by 1.20.

For the 5% reduced rate, multiply by 1.05. For any custom rate, multiply by (1 + rate/100). Our free VAT calculator handles any rate automatically.

To extract the net amount from a VAT-inclusive price, divide by 1.20.

Subtracting 20% instead of dividing by 1.20. £600 minus 20% = £480 — which is wrong. The correct net is £500. This error causes incorrect invoices and VAT return mistakes.

Multiply by 1.05 to add VAT at 5%, or divide by 1.05 to remove it. Example: £200 × 1.05 = £210 gross (VAT = £10).

The VAT Flat Rate Scheme (FRS) was designed to simplify VAT for small businesses. Instead of accounting for VAT on every transaction, you pay a fixed percentage of your gross (VAT-inclusive) turnover to HMRC and keep the difference.

Under the standard scheme, you charge 20% VAT and reclaim VAT on purchases. Under the FRS, you charge clients 20% as normal but pay HMRC only your sector flat rate on gross turnover.

Service businesses with low VAT-able expenses — consultants, contractors, IT professionals, designers. If you spend little on VAT-bearing purchases, you typically pay less VAT under FRS.

Businesses with significant VAT-bearing overheads often do better under the standard scheme. If your goods expenditure is less than 2% of gross turnover, you'll be a limited cost trader at 16.5% — which makes FRS uneconomical.

The UK VAT registration threshold is £90,000. But the rules around it are more complex than they first appear. Getting them wrong can cost you thousands in backdated VAT and penalties.

The £90,000 threshold applies to any rolling 12-month period — not a financial year or calendar year. You need to check your cumulative VAT-taxable sales at the end of every month going back 12 months.

HMRC will calculate the VAT you should have charged from the date you were required to register. You'll owe the full amount plus interest and penalties. Voluntary disclosure typically reduces penalties significantly.

For B2B businesses, voluntary registration is usually worthwhile — your clients can reclaim the VAT you charge. For B2C businesses, the 20% uplift is a real cost to consumers and requires more thought.