How Much is VAT in UK

How Much is VAT in UK

Reading Time: 10 minutes

Curious about the 2023/2024 VAT rate in the UK? Well, it’s basically a question of how much you value adding tax to your life.

What is VAT? How does it work? Who pays? And how much is it?

In this blog post, we’ll answer these questions and provide tips on claiming a VAT refund if eligible.

Here are highlights of what we’ll cover:

• What is VAT
• What is VAT rate
• How to Calculate VAT
• How does VAT work
• Submitting vat returns
• How to Pay VAT
• How to claim VAT refund in UK

Let’s get into the details.

What is VAT

Businesses that are registered for VAT add a tax called Value Added Tax to most of their products and services.

VAT charge is based on the product’s cost minus any materials already taxed in a previous stage. The charge is different depending on the goods or services.

VAT is an indirect tax because the tax burden is not necessarily on the same person who pays it to the tax authorities.

Over 160 countries, including all OECD members except the United States, use a VAT system.

As a rule of thumb, businesses with a turnover of over £90,000 in 12 months must register for VAT.

What is VAT Rate?

VAT rate, or Value Added Tax rate, is a percentage of the price of a good or service that is added to the final price paid by the consumer. It is a consumption tax applied to most goods and services sold in the UK.

The standard UK VAT rate is 20%, but there are also 5% and 0% reduced rates. The reduced rate applies to certain goods and services, such as children’s car seats and home energy. Zero-rated goods and services include most food and children’s clothes.

Make your tax returns process digital on Akaunting – Get Started!

Countries have different VAT rates, and some products or services may have reduced or special rates.

VAT Rate 101: Hungary has the highest standard VAT rate in the world at 27%, while the Bahamas has the lowest at 10%.

The table below shows the current UK VAT rates for different categories of goods and services:

Category	Examples	Rate
Standard rate	Most goods and services	20%
Reduced rate	Children’s car seats, home energy	5%
Zero rate	Most food, children’s clothes	0%
Exempt	Postage stamps, financial transactions	N/A

How to Calculate VAT

To calculate VAT, you need to determine the VAT rate, which depends on the type of good or service purchased.

The standard VAT rate in the UK is 20%, but there are also reduced rates of 5% and 0%. (see the VAT table above).

There are different ways to calculate VAT, depending on whether you want to add VAT to a net price, remove VAT from a gross price, or find out the VAT amount from a gross price. The following are some standard formulas for calculating VAT.

Add VAT to a net price

Multiply the net price by (1 + VAT rate).

For example, if the net price is £100 and the VAT rate is 20%.

Then, the gross price with VAT is:

£100 x (1 + 20%) = £120.

Remove VAT from a gross price

Divide the gross price by (1 + VAT rate).

For example, if the gross price is £120 and the VAT rate is 20%.

Then, the net price without VAT is:

£120 / (1 + 20%) = £100.

Find out the VAT amount from a gross price

Multiply the gross price by (VAT rate / (1 + VAT rate)).

For example, if the gross price is £120 and the VAT rate is 20%.

Then, the VAT amount is:

£120 x (0.2 / (1 + 20%)) = £20.

Alternatively, you can use online tools such as VAT Calculator, The VAT Calculator, or Wise to calculate VAT easily and quickly.

How Does VAT Work?

Let’s explore a real-life example of how VAT works and applies to the supply chain process using a hypothetical scenario involving a clothing manufacturer, a distributor, and a retail store.

Let’s begin with a Clothing manufacturer, “FashionFabrics Ltd.,” that produces trendy garments.

When FashionFabrics Ltd. manufactures a batch of clothing, they incur costs for raw materials, labor, and other production expenses. These costs include VAT paid on the raw materials and services they purchase.

For example, they purchase fabric worth £1,000 for their clothing production. The fabric supplier charges them 20% VAT on this transaction:

Cost of Fabric: £1,000 VAT (20% of £1,000): £200

So, the total cost to FashionFabrics Ltd. for the fabric is £1,000 (Cost of Fabric) + £200 (VAT) = £1,200.

Next, we have a Distributor, “FashionForward Distributors,” who purchases the finished clothing from FashionFabrics Ltd. at a wholesale price. FashionForward Distributors also incur storage, transportation, and other business expenses, including VAT for various inputs.

Let’s assume FashionForward Distributors buy the clothing at £2,000 from FashionFabrics Ltd., and the distributor’s other expenses amount to £500, which also attract 20% VAT:

Cost of Clothing from Manufacturer: £2,000 VAT (20% of £2,000): £400

Other Expenses: £500 VAT (20% of £500): £100

The total cost to FashionForward Distributors for the clothing and other expenses would be £2,000 (Cost of Clothing) + £400 (VAT on Clothing) + £500 (Other Expenses) + £100 (VAT on Other Expenses) = £3,000.

Finally, let’s look at a Retail store, “FashionHub Boutique,” which buys clothing from FashionForward Distributors at a retail price.

FashionHub Boutique also incurs expenses on running the store, such as rent, utilities, and staff salaries, including VAT.

FashionHub Boutique buys the clothing from FashionForward Distributors for £3,500 and has additional expenses of £1,000 that attract 20% VAT:

Cost of Clothing from Distributor: £3,500 VAT (20% of £3,500): £700

Other Expenses: £1,000 VAT (20% of £1,000): £200

The total cost to FashionHub Boutique for the clothing and other expenses would be £3,500 (Cost of Clothing) + £700 (VAT on Clothing) + £1,000 (Other Expenses) + £200 (VAT on Other Expenses) = £5,400.

End Customer: A customer, “Fashionista Jane,” walks into FashionHub Boutique and purchases one of the clothing items for £120. The retail price already includes VAT. Here’s how it breaks down:

Retail Price: £120 VAT (20% of £120): £24

Fashionista Jane pays a total of £124 for the clothing, which includes £24 in VAT. The boutique then collects this VAT and will submit it to HMRC during their VAT return.

Now, here’s where it gets interesting. The bakery will not keep that entire £24; they are merely acting as a VAT collector on behalf of the government.

At regular intervals, typically every quarter, the bakery will submit a VAT return to HMRC (Her Majesty’s Revenue and Customs). The VAT return summarizes all the VAT collected from customers (output VAT) and the VAT they paid on their business expenses (input VAT).

Submitting VAT Returns

If registered for VAT in the UK, you must submit VAT returns quarterly to HM Revenue and Customs (HMRC).

A VAT return is a document that displays the amount of output VAT you’ve charged on your sales and the amount of input VAT you’ve paid on your purchases. You can usually deduct or credit your input VAT against your output VAT and pay only the difference to HMRC.

More details on claiming deduction later

There are different ways to submit VAT return. You can either:

• File your return online using the HMRC website.
• Send your return by post.
• Use accounting software, like Akaunting, that is compatible with Making Tax Digital for VAT.

Following the Making Tax Digital initiative by the UK government, submitting tax returns online is best advised.

Making Tax Digital aims to make tax administration more effective, efficient, and easier for taxpayers. Businesses and individuals must keep digital records and use compatible software to submit their tax returns online.

Submit Your Tax Return Online on Akaunting’s MTD for VAT (UK)

Most businesses with a taxable turnover above £85,000 are already subject to Making Tax Digital for VAT. However, since April 2023, businesses with a taxable turnover below this threshold must comply with the same regulations.

Additionally, starting in April 2024, self-employed individuals and landlords with an annual income exceeding £10,000 will be required to comply with Making Tax Digital for income tax.

Please ensure that you submit your VAT return by the deadline indicated on the form. Usually, this deadline falls one month and seven days after the end of your accounting period. Additionally, it is crucial to settle any outstanding VAT balance by the same deadline.

How to Pay VAT

For UK-based businesses registered for VAT, paying HM Revenue and Customs (HMRC) a quarterly VAT amount based on their sales and purchases is mandatory.

Depending on your preference and convenience, there are different ways to do HMRC VAT Payment. Here are some of the most common methods:

Online

To pay your VAT bill online, you can either approve payment through your bank account using your online banking details or use a debit or corporate credit card.

Ensure you have your 9-digit VAT registration number and a payment reference number from HMRC. This online service makes it easy to pay your VAT bill securely and conveniently.

Direct Debit

You can opt for Direct Debit on your HMRC VAT Payment, which is a convenient automatic payment method from your bank account. Before the payment deadline, establish a Direct Debit instruction with HMRC at least ten days in advance.

Bank Transfer

You can pay HM Revenue and Customs (HMRC) directly from a UK bank account with Faster Payments, CHAPS or Bacs. Contact your bank or use your online bank account or banking app to pay.

Use the following bank details for HMRC:

Sort code – 08 32 00

• Account number – 11963155Account name – HMRC VAT

For overseas payments, use the following bank details for HMRC:

• Account number (IBAN) – GB36BARC20051773152391Bank identifier code (BIC) – BARCGB22Account name – HMRC VAT

You will need your 9-digit VAT registration number.

At your bank or building, society

You’ll need to order paying-in slips online or by phone from HM Revenue and Customs (HMRC) before you can pay this way. It can take up to 6 weeks for them to arrive.

To pay at your bank or building society, please use the provided paying-in slips and pay by cash or cheque. Ensure the cheque is payable to ‘HM Revenue and Customs only.’

Write your 9-digit VAT registration number on the back of your cheque. You will find your registration number:

• in your VAT online account
• on your VAT registration certificate

Standing Order

If you are a business that uses the Annual Accounting Scheme or Payments on Account, you can make regular payments to HMRC through a standing order.

To set up a standing order for VAT, you will need to get in touch with HMRC. Standing orders take three working days to reach the HM Revenue and Customs (HMRC) bank account.

How to claim VAT refund in UK

To claim a VAT refund in the UK, one must submit a VAT return to HMRC every three months. This return should indicate the VAT paid and the VAT charged to customers.

To comply with HMRC regulations, it is necessary to provide proof of purchase for goods and services and evidence of collected VAT on any sold items.

In case you don’t have a receipt, there’s still a chance for you to claim back VAT by providing proof of the transaction through other means, such as a bank statement. However, you must also demonstrate that the item was used for business purposes.

Let’s take a real-world example to understand how VAT refund works in the UK.

Scenario: Sarah’s Stationery Shop

Sarah owns a small stationery shop, “Sarah’s Stationery Haven,” in the heart of London. As a VAT-registered business, Sarah charges VAT on her sales to customers and pays VAT on her business expenses.

Step 1: Input VAT (VAT on Expenses)

Sarah purchases stationery supplies for her shop from a VAT-registered supplier. Let’s say she buys office stationery worth £1,000. The supplier charges her 20% VAT on this transaction:

Cost of Stationery Supplies: £1,000 VAT (20% of £1,000): £200

So, Sarah pays a total of £1,200 for the stationery supplies, including the £200 VAT.

Step 2: Output VAT (VAT on Sales)

Sarah sells stationery items to her customers, charging them VAT. For example, she sells office supplies to a business customer for £300. The VAT rate is 20%, so she adds VAT to the sale:

Selling Price to Customer: £300 VAT (20% of £300): £60

The customer pays a total of £360 for the office supplies, which includes £60 in VAT.

Step 3: VAT Liability

Sarah must calculate her VAT liability at the end of the accounting period (usually a quarter). This involves subtracting the input VAT (VAT on expenses) from the output VAT (VAT on sales) during that period.

Sales VAT (Output VAT): £60 (from the sale to the business customer)

Expenses VAT (Input VAT): £200 (from purchasing stationery supplies)

Liability VAT: £60 (Output VAT) – £200 (Input VAT) = -£140

Step 4: VAT Refund

In this example, Sarah’s VAT liability is negative (-£140). This means she has paid more VAT on her expenses than collected from sales during the accounting period.

Since Sarah is eligible for a VAT refund when her VAT liability is negative, she can claim this excess VAT back from HMRC. She includes the negative amount on her VAT return, and HMRC will process the refund.

Final thoughts

VAT is a complex tax affecting most UK businesses and consumers. It is essential to understand how it works, the current rates, and how to claim a refund if you are eligible.

Complying with the MTD requirements and submitting your VAT returns and payments on time is also essential. You can contact a professional tax adviser for more help or advice on VAT matters.

Akaunting also helps you submit your tax returns online through MTD for VAT.

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Frequently Asked Questions

How much is VAT on services in UK

The VAT rate on services in the UK differs based on the type and location of the service. The regular rate is 20% (such as catering, hairdressing, legal advice, accounting, and consulting). Certain services may be eligible for a reduced rate of 5% (home energy, such as installation of insulation, solar panels, or heat pumps), a zero rate of 0% (education, health, welfare, and charity, such as tuition fees, medical care, social work, and fundraising events), or be exempt or outside (financial services, insurance, postage stamps, and property transactions) the scope of VAT entirely.

What is the VAT threshold?

The VAT threshold is the minimum amount of annual sales that a business must achieve before it is obligated to register for VAT and collect VAT on its products and services. Currently, the VAT registration threshold in the UK is set at £85,000. Therefore, any business earning annual sales exceeding £85k must register for VAT, collect VAT on their products and services, and pay VAT on goods and services purchased for their business.

What is 324 payment?

The £324 payment is a government scheme that aims to help low-income households cope with the rising cost of living in the UK. It is part of a £1,200 support package with other measures such as energy bill discounts, council tax rebates, and winter fuel payments. Read details here.

What is Import and Export VAT?

When bringing goods into the UK from the EU, it’s typically necessary to pay UK VAT. If you aren’t registered for VAT, you’ll be charged the VAT rate of the country where the goods were purchased. For goods imported from non-EU countries, VAT is usually set at the same rate as if they were purchased within the UK. When exporting goods to EU countries, paying export VAT depends on whether your customer is registered for VAT and if you’re exporting goods or services. It’s advisable to review the regulations specific to each country. Export VAT usually doesn’t apply to exporting to non-EU countries, and you can typically zero-rate these goods and services.

Who is Eligible for VAT registration?

You are eligible for a VAT refund in the UK if you are registered for VAT and have a turnover of over £85,000 in 12 months. Also, if the amount of VAT you pay suppliers is more than what you receive from customers during a VAT accounting period (typically every three months), you’ll end up with a negative net VAT amount. The good news is that you can claim this back from HMRC.