What is VAT?
Value Added Tax (VAT) is a consumption tax levied on most goods and services sold in the UK. It is collected by businesses on behalf of HMRC at each stage of the supply chain. The end consumer ultimately bears the cost, which is why VAT-inclusive prices are quoted for retail customers, while business-to-business transactions are often quoted excluding VAT (ex-VAT or net). The UK's standard VAT rate is 20%, though there are reduced and zero rates for specific goods and services.
The three UK VAT rates
Standard rate (20%) applies to most goods and services: electronics, professional services, new-build commercial property, and most retail items. Reduced rate (5%) applies to specific goods: domestic fuel and power, children's car seats, and certain energy-saving materials. Zero rate (0%) applies to most food, children's clothing, books, newspapers, and new residential property — these are taxable supplies, but at a nil rate, meaning the business can still reclaim input VAT. Some supplies are VAT-exempt entirely, including financial services, insurance, and private education — exempt businesses cannot reclaim input VAT, making VAT a real cost to them.
When must you register for VAT?
You must register for VAT once your taxable turnover exceeds the registration threshold in any 12-month period. The 2024/25 threshold is £90,000. Once registered, you must charge VAT on your supplies, file quarterly VAT returns, and pay HMRC the difference between the VAT you have collected and the VAT you have paid on purchases (input tax). Voluntary registration below the threshold can be advantageous if most of your customers are VAT-registered businesses (they reclaim it anyway) and you have significant input VAT to reclaim. It is not advisable if you sell predominantly to consumers, as your prices will appear 20% higher.
Adding VAT to a price (net to gross)
To add 20% VAT to a net price: multiply by 1.20. A product costing £100 net becomes £120 gross. For 5% VAT: multiply by 1.05. You can verify this instantly with our VAT calculator. Businesses quote net prices in B2B contexts and gross (VAT-inclusive) prices in B2C contexts. On your invoices, you should show: the net amount, the VAT rate, the VAT amount, and the gross total separately for each line item. This is a legal requirement for VAT invoices when your customer is also VAT-registered.
Removing VAT from a gross price (reverse VAT)
To find the net price within a VAT-inclusive amount: divide by 1.20 (for 20% VAT). A receipt showing £144 gross contains £120 net and £24 VAT. The formula is: Net = Gross ÷ 1.20; VAT = Gross − Net. A common mistake is to multiply the gross by 20% to find the VAT — this gives the wrong answer (£28.80 rather than £24). Our VAT calculator handles both directions correctly. Reverse-VAT calculations come up constantly when processing expense claims, reconciling supplier invoices, or checking that a price has been correctly charged.