What is VAT?

VAT — Value Added Tax — is one of the taxes that affects most UK businesses at some point in their growth, and understanding what it is, how it works, and when it becomes relevant is useful knowledge for any founder from the earliest stage. Many new business owners encounter the term frequently but have only a partial understanding of what VAT actually involves in practice.

VAT is a consumption tax charged on the sale of most goods and services in the UK. Businesses that are VAT-registered charge VAT on their taxable sales and remit it to HMRC, while reclaiming the VAT paid on their own business purchases. The difference between VAT collected and VAT paid is settled with HMRC through regular returns. Not all goods and services attract standard-rate VAT — some are zero-rated or exempt, which affects how a business calculates and reports its VAT position.

VAT registration becomes compulsory once a business's taxable turnover exceeds the VAT registration threshold set by HMRC — though businesses can also register voluntarily before that point if it makes commercial sense. The rules around which goods and services are VAT-able, and at which rate, can be complex for businesses operating across different categories. Our guide to VAT for UK businesses covers the key principles and when registration is required.