VAT Basics: Charging and Reclaiming

When you're VAT-registered, you need to charge VAT on most of what you sell (known as output tax) and you can reclaim VAT on most of what you buy for your business (known as input tax). The difference between these two amounts is what you pay to HMRC, or what HMRC refunds to y...

Introduction

Charging VAT on your sales

Once you're VAT-registered, you must charge VAT on the goods and services you sell, unless they're exempt or zero-rated. All VAT-registered businesses are now automatically signed up for Making Tax Digital for VAT.

When you make a sale, you need to:

Work out the VAT-inclusive price using the correct VAT rate
Show the VAT information on your invoice, including your VAT number and displaying the VAT separately
Record the transaction in your VAT account (a summary of your VAT)
Include the amount on your VAT return

The three VAT rates

There are three rates of VAT, and you must apply any rate changes immediately from the date they take effect.

Standard rate (20%)

You charge the standard rate of 20% on most goods and services. Use this rate unless what you're selling is specifically classed as reduced or zero-rated.

Reduced rate (5%)

You charge the reduced rate of 5% on certain goods or services. Examples include:

Child car seats
Domestic fuel or power
Mobility aids for someone over 60 that are installed in their home

Zero rate (0%)

Zero rate means you still charge VAT and include it on your invoices, but the rate is 0%. This applies to:

Goods you export from Great Britain (England, Wales and Scotland) to somewhere outside the UK
Goods you export from Northern Ireland to somewhere outside the UK and EU
Goods you supply from Northern Ireland to a VAT-registered EU business (you can check the VAT number is valid using the EU's online system)
Certain products like books and newspapers, children's clothes and shoes, and motorcycle helmets

Calculating prices with VAT

Adding VAT to your prices (VAT-inclusive prices)

To add standard rate VAT (20%) to a price, multiply the price excluding VAT by 1.2.

Example: You're selling a chair for £60 and need to add 20% VAT. 60 × 1.2 = 72. The price including VAT is £72.

To add reduced rate VAT (5%) to a price, multiply the price excluding VAT by 1.05.

Example: You're selling a child's car seat for £200 and need to add 5% VAT. 200 × 1.05 = 210. The price including VAT is £210.

Working out VAT you've paid (VAT-exclusive prices)

To work out how much VAT you paid on something charged at standard rate, divide the price including VAT by 1.2.

Example: You bought a table for £180 including 20% VAT. 180 ÷ 1.2 = 150. The price excluding VAT is £150. The VAT you can reclaim is £30.

To work out the VAT on something charged at reduced rate, divide the price including VAT by 1.05.

Example: You bought a stairlift for £483 including 5% VAT. 483 ÷ 1.05 = 460. The price excluding VAT is £460. The VAT you can reclaim is £23.

When you cannot charge VAT

VAT-exempt items

You cannot charge VAT on exempt goods or services. You should still record these transactions in your general business accounts. Examples of VAT-exempt items include:

Financial services, investments and insurance
Garages, parking spaces and houseboat moorings
Property, land and buildings
Education and training (excluding private schools)
Healthcare and medical treatment
Funeral plans, burial or cremation services
Charity events
Antiques
Gambling or lottery tickets
Sports activities

Out of scope items

Some things are outside the VAT system entirely ('out of scope'), so you cannot charge or reclaim VAT on them. Examples include:

Goods or services you buy and use outside the UK
Statutory fees like the London congestion charge
Goods you sell as part of a hobby (like stamps from a collection)
Donations to a charity where you get nothing in return

VAT on discounts and special offers

Basic discounts

For straightforward discounts (like 20% off), charge VAT on the discounted price.

Multi-buy offers

For multi-buy offers where the customer gets a discount for buying more items (like 3 for £20), charge VAT on the combined price if all items have the same VAT rate.

If the items have different VAT rates, you need to use a method called 'apportionment' to split the VAT correctly.

Link-save offers (buy one, get one free)

For link-save offers, you normally use apportionment to work out the VAT. However, you can charge VAT on the combined value of items if the free or discounted item:

Has a resale value of less than £1
Has a sale value of less than £5
Costs you less than 20% of the total of the other items in the offer
Is not sold at a separate price from the main product

Coupons and vouchers

Do not charge VAT on a money-off coupon or voucher you give away free with another item at the time of purchase, or on 'face value' vouchers that can be used for more than one type of good or service.

Charging VAT to charities

VAT-registered businesses can sell certain goods and services to charities at zero or reduced rate. It's your responsibility to check the charity is eligible and apply the correct rate.

To verify eligibility, ask the charity for:

Their Charity Commission registration number, or
A letter of recognition from HMRC if they're not registered with the Charity Commission (such as charities in Scotland or Northern Ireland)

You also need a written declaration or certificate from the charity confirming they meet the conditions for the particular VAT relief. The declaration must follow a specific format and be separate from the order form or invoice. Keep these declarations for at least 4 years.

Community amateur sports clubs do not qualify for VAT reliefs for charities.

Reclaiming VAT on your purchases

As a VAT-registered business, you can reclaim the VAT you pay on goods and services you buy for your business (input tax). This is the VAT you've paid to other businesses.

When you submit your VAT return (usually every 3 months), you report:

The amount of VAT you've charged your customers (output tax)
The amount of VAT you've paid to other businesses (input tax)

If you've charged more VAT than you've paid, you must pay the difference to HMRC. If you've paid more VAT than you've charged, HMRC will usually repay you the difference.

Keeping VAT records

You must keep records of how much VAT you pay for things you buy for your business. This includes keeping invoices from suppliers, which must show:

The supplier's VAT registration number
The VAT amount shown as a separate figure

You need to maintain these records to support your VAT returns and any reclaims you make. HMRC may check your records, and you must keep VAT records for at least 4 years (this applies to supplier invoices, charity declarations, and your VAT account records).

VAT registration threshold

You must register for VAT if your VAT taxable turnover is more than £90,000. You can also choose to register voluntarily if your turnover is less than £90,000.

Your taxable turnover is the total value of everything you sell or supply that is not exempt from VAT.

Once registered, you can cancel your VAT registration if your taxable turnover falls below £88,000 (though this is optional).

VAT accounting schemes

VAT schemes can simplify how you calculate and account for VAT. They don't change the amount of VAT you charge customers, and joining them is voluntary.

Flat Rate Scheme

The Flat Rate Scheme lets you work out what you owe HMRC as a percentage of your gross turnover. You can join if your annual taxable turnover is £150,000 or less (excluding VAT). You must leave if your turnover exceeds £230,000.

Other schemes

If your annual VAT taxable turnover is £1.35 million or less, you may be eligible for:

Annual Accounting Scheme – complete one VAT return each year instead of 4. You must leave if turnover exceeds £1.6 million.
Cash Accounting Scheme – pay VAT to HMRC when your customer pays you rather than when you invoice them. You must leave if turnover exceeds £1.6 million.

If you run a retail business or sell second-hand goods, you may be able to use VAT margin schemes or VAT retail schemes.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.