What Is VAT and How Does It Work?
Value Added Tax (VAT) is a consumption tax levied on the sale of goods and services in the United Kingdom. It is charged at each stage of the supply chain — from manufacturer to retailer to end consumer — but the final burden falls on the consumer, who pays the full VAT-inclusive price. Businesses registered for VAT collect the tax on behalf of HM Revenue and Customs (HMRC) and can reclaim the VAT they have paid on their own purchases (known as "input tax").
VAT was introduced in the UK in 1973 when the country joined the European Economic Community. Despite Brexit, the UK retained VAT as its primary consumption tax. The current VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period (as of 2024). Businesses below this threshold may register voluntarily, which can be advantageous if they sell primarily to VAT-registered businesses.
UK VAT Rates Explained
The UK operates three VAT rates, each applying to different categories of goods and services:
| Rate | Percentage | Examples |
|---|---|---|
| Standard Rate | 20% | Most goods and services, electronics, clothing (adult), restaurant meals, alcohol |
| Reduced Rate | 5% | Home energy (gas and electricity), children's car seats, sanitary products, nicotine patches |
| Zero Rate | 0% | Most food, children's clothing, books, newspapers, public transport, prescription medicines |
Note that zero-rated items are still technically VAT-taxable — they are just taxed at 0%. This distinction matters for VAT-registered businesses, as they can still reclaim input tax on costs related to zero-rated supplies. Items that are "exempt" from VAT (such as financial services, insurance, and education) are different: businesses making exempt supplies generally cannot reclaim input VAT on related costs.
How to Add VAT to a Net Price
To add VAT to a net (ex-VAT) price, multiply the net price by the VAT rate and add the result. For the standard 20% rate: Gross price = Net price × 1.20. For example, a product priced at £100 net becomes £120 gross. Our calculator performs this instantly — simply enter the net price, select "Add VAT," and choose your rate.
How to Remove VAT from a Gross Price
Removing VAT from a gross (VAT-inclusive) price is slightly less intuitive. You cannot simply subtract 20% from the gross price — that would give the wrong answer. The correct formula is: Net price = Gross price ÷ 1.20. For example, a gross price of £120 gives a net price of £100, and a VAT amount of £20. A common mistake is to calculate 20% of £120 (which gives £24, not £20) — always divide by 1.20 rather than subtracting a percentage.
VAT for Small Businesses and the Self-Employed
If your business turnover is approaching the £90,000 VAT registration threshold, it is important to monitor your rolling 12-month sales carefully. HMRC requires you to register within 30 days of the month in which you exceed the threshold. Late registration can result in penalties and a requirement to pay the VAT you should have charged, even if you did not collect it from customers.
HMRC's Making Tax Digital (MTD) for VAT requires all VAT-registered businesses to keep digital records and submit VAT returns using compatible software. This has been mandatory for all VAT-registered businesses since April 2022. If you are newly registered, ensure your accounting software is MTD-compatible before your first return is due.
The figures produced by this calculator are for guidance only. VAT rules are complex and subject to change. For advice specific to your business, consult a qualified accountant or tax adviser, or refer directly to HMRC's VAT guidance at gov.uk.