What Is VAT? A Simple Explanation

VAT in Plain English

Value Added Tax (VAT) is a tax on the value added at each stage of production and distribution. It's charged on most goods and services sold in the UK at 20% (the standard rate).

Here's the simple version: when you buy something for £10, the shop charges you £12 (£10 plus £2 VAT). The shop collects that £2 on behalf of HMRC.

How It Works for Businesses

If you're VAT-registered, you act as a VAT collector for HMRC:

1. You charge VAT on your sales (output tax)
2. You pay VAT on your business purchases (input tax)
3. You pay HMRC the difference (output tax minus input tax)

If you charge £2,000 VAT on sales and pay £500 VAT on purchases, you owe HMRC £1,500. If you pay more VAT on purchases than you charge on sales, HMRC refunds you the difference.

The Three VAT Rates

• Standard rate (20%): Most goods and services
• Reduced rate (5%): Some items like home energy and children's car seats
• Zero rate (0%): Essentials like most food, children's clothing, and books

Some supplies are exempt — no VAT is charged and you can't reclaim related input VAT. Examples include insurance, financial services, and residential property lettings.

Do You Need to Register?

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. You can also register voluntarily below this threshold — see our guide on voluntary VAT registration.

Why It Matters

VAT affects your pricing, cash flow, and administration. Understanding it helps you price correctly, claim back what you're owed, and avoid penalties.

With Accounted, Penny handles VAT calculations, return preparation, and MTD filing automatically — so you can focus on your business.

New to VAT? Start your free trial with Accounted and let Penny guide you through it.