What Is VAT? A Plain-English Guide for New Accountants and Small Businesses

What Is VAT?

VAT (Value Added Tax) is a consumption tax charged on most goods and services sold in the UK and Ireland. Businesses registered for VAT charge it on their sales (output VAT) and reclaim it on their purchases (input VAT). The net amount — output VAT minus input VAT — is paid to HMRC (UK) or Revenue (Ireland) each quarter.

VAT Rates in the UK

The standard rate is 20%, applied to most goods and services. A reduced rate of 5% applies to certain items including domestic energy and children's car seats. A zero rate (0%) applies to most food, children's clothing, books, and public transport. Some items are VAT exempt — financial services, insurance, and education — meaning VAT cannot be charged or reclaimed on them.

When Must a Business Register for VAT?

In the UK, businesses must register for VAT when their taxable turnover exceeds 90,000 in any 12-month period (the threshold for 2024/25, rising from the previous 85,000 threshold). Businesses can also register voluntarily below the threshold, which may be beneficial if they make significant VAT-able purchases they want to reclaim.

How VAT Returns Work

Most VAT-registered businesses submit quarterly VAT returns to HMRC via Making Tax Digital (MTD) software. The return shows: total sales and output VAT charged; total purchases and input VAT reclaimed; and the net VAT due or refundable. If output VAT exceeds input VAT, the business pays the difference. If input VAT exceeds output VAT (common for exporters or businesses with high purchase VAT), HMRC refunds the difference.

VAT in ACCA and ATT

VAT is examined in ACCA TX (Taxation) and is a significant topic in ATT (Association of Taxation Technicians) qualifications. Understanding VAT is also practically essential for accountants working with small business clients, as VAT queries are among the most common issues arising in practice.