VAT can appear to be a simple percentage added to a bill. In reality, the UK system has several rates, registration rules and exemptions that can change how much a customer pays and what a business must report.
As of the 2026–27 tax year, the standard UK VAT rate remains 20%, while reduced-rate VAT is 5% and zero-rated supplies are charged at 0%.
What Is VAT in the UK?
VAT, or Value Added Tax, is a consumption tax applied to many goods and services sold in the UK. HM Revenue & Customs (HMRC) describes VAT as a tax businesses charge when they make business supplies in the UK or the Isle of Man.
For shoppers, VAT is often already included in the displayed price. For businesses, however, the system is more complicated. A VAT-registered business generally charges VAT on taxable sales and may reclaim eligible VAT paid on business purchases.
The important point is that not everything is charged at 20%.
The Three Main VAT Rates
The standard rate is 20% and applies to most goods and services. HMRC says businesses should normally use this rate unless a product or service qualifies for a reduced or zero rate.
The reduced rate is 5%. It applies only to specific goods, services or circumstances. HMRC gives examples including certain child car seats and some domestic fuel and power supplies.
Then there is the zero rate, at 0%. This does not mean the supply is outside the VAT system. A zero-rated supply is still a taxable supply, but VAT is charged at 0%. Examples include many basic food products and children’s clothes.
There are also goods and services that are VAT-exempt, which is different from being zero-rated. The distinction matters when a business calculates its taxable turnover and considers registration.
When Does a UK Business Have to Register?
This is where the £90,000 figure becomes important.
According to current HMRC guidance, a business must register for VAT when its taxable turnover for the previous 12 months goes over £90,000. It must also register if it expects its taxable turnover to exceed £90,000 during the next 30 days.
The threshold remains £90,000 for 2026–27, while the deregistration threshold is £88,000.
That figure relates to taxable turnover, rather than simply every payment entering a business bank account. HMRC says taxable turnover includes zero-rated, reduced-rated and standard-rated supplies, while exempt and out-of-scope supplies are treated differently.
Can a Small Business Register Voluntarily?
Yes.
A business below the £90,000 threshold can choose to register voluntarily. HMRC confirms that voluntary registration is available when taxable turnover is below the compulsory registration threshold.
That can make the decision more complicated than simply asking whether turnover has reached £90,000. The business may need to consider its customers, purchases, VAT position and administrative responsibilities before deciding whether voluntary registration makes sense.
There is no universal answer for every business.
What Happens After Registration?
Once registered, a business can charge VAT on taxable sales from its effective registration date. HMRC also allows VAT-registered businesses to reclaim eligible VAT on business purchases, subject to the applicable rules.
The business then has VAT reporting responsibilities. The exact accounting treatment depends on the supplies being made and the accounting scheme being used.
HMRC also operates different VAT accounting schemes. For example, its current guidance lists a £150,000 turnover limit for joining the Flat Rate Scheme, while the Cash Accounting and Annual Accounting schemes have higher thresholds.
What About Businesses Based Outside the UK?
This is one area where assumptions can quickly become misleading.
HMRC states that a business based outside the UK may have to register for VAT when it supplies goods or services to the UK, with rules depending on its circumstances. For non-established taxable persons, the normal UK registration threshold is not generally available in the same way as it is for UK-established businesses.
Therefore, simply saying that a foreign business is “under £90,000” does not necessarily settle its VAT obligations.
Why Does VAT Appear on Everyday Prices?
VAT is ultimately built into the cost of many purchases. At the standard rate, a £100 VAT-exclusive price becomes £120 including VAT.
The reverse calculation is different. If a customer pays £120 for something that includes VAT at 20%, the VAT element is £20 rather than £24. HMRC’s guidance confirms that a £120 VAT-inclusive amount at 20% represents £100 before VAT plus £20 VAT.
That distinction becomes particularly important for invoices, accounting records and business pricing.
The VAT Question Is More Complicated Than One Percentage
The basic facts are clear: UK VAT currently has a standard rate of 20%, a reduced rate of 5%, and a zero rate of 0%. The compulsory registration threshold for most UK-established businesses is currently £90,000.
But the correct VAT treatment depends on the product or service, the customer’s circumstances, the location of the business and sometimes where the transaction takes place.
So when someone asks, “What is VAT in the UK?”, the 20% figure is only the beginning of the answer.
Author Bio:
Written by Alex Morgan, a UK-focused business and finance journalist covering taxation, consumer costs and small-business regulation. His work focuses on turning complex financial rules into clear, factual explanations for general readers.
