VAT Rates & Charging

Understanding which VAT rate applies to your goods or services is fundamental to getting your VAT right. Charging the wrong rate can lead to penalties, interest, and additional assessments from HMRC. This guide explains the four VAT treatments and the rules for VAT invoicing.

Standard Rate — 20%

The 20% standard rate applies to the majority of goods and services supplied in the UK. This includes electronics, clothing (adult), professional services, hospitality, motor vehicles, and most consumer goods. Unless a supply qualifies for a reduced rate, zero rate, or exemption, the standard rate applies by default.

Reduced Rate — 5%

The 5% reduced rate applies to a limited range of supplies. Key examples include domestic fuel and power (gas, electricity, heating oil), children's car seats (but not booster cushions), sanitary products, smoking cessation products, and installations of energy-saving materials subject to certain conditions. The reduced rate also applies to residential property renovations where the property has been empty for two years or more.

Zero Rate — 0%

Zero-rated supplies are taxable at 0%, which means you still need to include them on your VAT return and you can recover input tax attributable to them. Key zero-rated items include most food (but not restaurant meals or hot takeaways), books, newspapers and magazines, children's clothing and footwear, public transport, prescription medicines, and exports. New residential buildings also qualify for zero-rating.

Exempt Supplies

Exempt supplies are outside the VAT system entirely. You do not charge VAT on exempt supplies, but you also cannot recover input tax on costs relating to them. Exempt supplies include insurance (including insurance broking), education and vocational training provided by eligible bodies, healthcare, postal services by Royal Mail, and certain financial services such as lending and deposit-taking. Businesses making only exempt supplies cannot register for VAT.

Partial Exemption

Where a business makes both taxable and exempt supplies, it must apply partial exemption rules to apportion input VAT recovery. The standard method uses the proportion of taxable supplies to total supplies. HMRC can approve a special method where the standard method produces an unfair result. The de minimis rules allow full recovery where exempt input tax is £625 per month or less and less than 50% of total input tax.

VAT Invoicing Rules

A valid VAT invoice must show the supplier's name and address, VAT number, invoice date and number, customer's name and address, a description of goods or services, the net amount, VAT rate charged, and the total VAT payable. For supplies to other VAT-registered businesses, a full invoice is required. For sales to non-business customers, a simplified invoice (showing the total including VAT and the rate) is sufficient. Invoices must be issued within 30 days of the supply. Digital invoices are acceptable under MTD rules.