Chapter 1

What is VAT?

You’ve probably heard about VAT before – it stands for value-added tax and is added onto prices in the UK.

A small business owner holding up a price tag

How can VAT affect my business?

  • You may need to add VAT to your prices
  • You will need to send that extra money to HMRC
  • You can claim back any VAT that you’re charged on business supplies

How much is VAT

  • 20% is the VAT rate for most goods and services
  • 5% is applied to some health, energy, heating, and protective products and services
  • 0% is applied to a range of products and services to do with health, building, publishing and kids’ clothing

VAT exemptions and out-of-scope sales

VAT does not apply to all products and services. Some things, such as insurance, antiques, arts, and educational training are exempt. Other things, like statutory fees, are out of scope (they sit outside the tax system). Being exempt or out of scope is different from charging 0% VAT.

How does VAT work?

The VAT on any item is designed to be paid by the consumer in the end, rather than by the businesses involved in its supply. Take this example:

An infographic on how VAT works

VAT on imports

You’re generally required to pay VAT on goods that you import into the UK. That VAT will probably be added to the price when you pay customs. You can generally claim it back when submitting your VAT return.

VAT on exports

If you sell goods and services to customers within the EU, you’ll probably need to add export VAT. The rate will depend on what you’re selling and who you’re selling to.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

Guide to VAT

Making a start with VAT? Don’t worry. It’s a little extra admin, but follow our guide and you’ll soon be on top of it.

Download the guide to VAT

Get your small business tax sorted. Fill in your details to get our full VAT guide as a PDF.

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