1. Understand What VAT Is
VAT (Value Added Tax) is a sales tax applied to most goods and services in the UK. Businesses registered for VAT must charge it on taxable sales and pay it on purchases. The difference is reported to HMRC via VAT returns.
2. Know the Current VAT Rates (2024)
There are three main VAT rates in the UK:
- Standard Rate (20%) – applies to most goods and services.
- Reduced Rate (5%) – for items like children’s car seats and home energy.
- Zero Rate (0%) – for items like most food, books, and children’s clothing.
Some goods/services are exempt (e.g., education, rent) or outside the scope of VAT (e.g., salaries).
3. How to Add VAT to a Price
To add 20% VAT to a net price:
- Multiply the net price by 1.20
Example: £100 × 1.20 = £120 (including VAT)
For 5% VAT:
- Multiply the net price by 1.05
Example: £100 × 1.05 = £105
4. How to Work Out the VAT from a Gross Price
To extract VAT from a price that includes VAT (e.g., 20% rate):
- Divide by 1.20 to find the net price
- Subtract the net price from the gross price to find the VAT
Example:
Gross price = £120
Net = £120 ÷ 1.20 = £100
VAT = £120 – £100 = £20
For 5% VAT, divide the gross by 1.05.
5. When to Register for VAT
You must register if:
- Your taxable turnover exceeds £90,000 (as of 2024)
- You expect to exceed this threshold within 30 days
- You want to reclaim VAT on business purchases voluntarily
Register via the HMRC website and get a VAT number.
6. Filing VAT Returns
VAT-registered businesses usually submit returns quarterly using Making Tax Digital (MTD) software. Your return shows:
- VAT charged on sales (output tax)
- VAT paid on purchases (input tax)
- The difference you owe or reclaim
7. Common Mistakes to Avoid
- Charging VAT when not registered
- Using the wrong VAT rate
- Missing the VAT registration threshold
- Not issuing proper VAT invoices
- Late return submissions and payments
Frequently Asked Questions
How do I calculate VAT manually?
Multiply the net amount by the VAT rate (e.g., for 20%, multiply by 0.20).
Do I charge VAT on everything?
Not everything—some goods/services are zero-rated or exempt. Always check HMRC guidance.
What is the VAT threshold for 2024?
The VAT registration threshold in the UK is £90,000 in annual taxable turnover.
Can I claim VAT back as a small business?
Yes, if you’re VAT-registered, you can reclaim VAT on eligible business expenses.
Is VAT calculated before or after discount?
VAT is calculated after applying any discounts to the net price.
How often do I file VAT returns?
Typically every quarter, but it depends on your VAT accounting scheme.
Conclusion
Understanding how to work out VAT in the UK is essential for accurate pricing and legal compliance. Whether you’re charging customers or reclaiming expenses, following the correct method and keeping up with HMRC rules will ensure your business stays on track.