How Much is VAT in the UK?
As a small business owner, youre probably already familiar with VAT, because you may be required to register for and collect it. Theres a lot of information to get to grips with, but its important that you understand how VAT works, as it can have a serious impact on your bottom line. Learn more about the current UK VAT rate, right here. VAT stands for Value Added Tax. Its a form of consumption tax levied against the sale of goods and services in the UK. Put simply, it adds to the cost of almost everything that you buy. Its important to note that this is a type of indirect tax which means that it isnt directly collected by the government from the customer, but by businesses themselves. VAT rate is the amount of VAT thats applied to goods and services, as a percentage. So, if the VAT rate is 17.5% and the price of the goods is 1,000, the total bill would be 1,175 ((1000 x 0.175) + 1000). There are three main UK VAT rates: standard, reduced rate, and zero rate. Heres our simple guide to what each of these terms mean for your business:  Standard rate  This is the highest UK VAT rate, and the rate that most goods and services in the UK are subject to. Although most food and drink are zero-rated for VAT, there are a couple of exceptions, including alcoholic drinks, confectionary, sports drinks, and hot takeaways. Reduced rate  This is a reduced rate that certain goods and services are subject to, including products to help people stop smoking and childrens car safety seats. Zero rate  The zero rate applies to a range of different goods and services, including travel fares, baby/childrens clothes, books, and most food. Its also important to note that some goods and services are exempt from VAT, such as financial and property transactions and postage stamps. Although it might seem like zero-rated goods and VAT-exempt goods are the same thing, they arent. In short, zero-rated goods are items that the government could charge VAT on, but the rate is currently set at zero. Exempt items are goods that VAT isnt charged or paid on. The UK VAT rate is subject to change. You can check the current UK VAT rate on the governments website. VAT was introduced for the first time in 1973, when it replaced the purchase tax. Its changed substantially since it was first introduced. There are a range of reasons why the government may choose to increase or decrease the UK VAT rate, including the need to boost tax revenues or increase public spending. Initially, the UK VAT rate was charged at 10%. It rose gradually, until it hit 17.5% from 1991 to 2008. After a small dip to 15% in 2008-2009, it rose again to 17.5%, before rising to the current UK VAT rate of 20% in 2011. All businesses which have an annual turnover which is more than the current VAT threshold (at the time of writing, this is set at 85,000) need to register for VAT and file a quarterly VAT return. Once youre registered, youll need to start charging VAT on required products and paying VAT on products/services you purchase. Its important to charge VAT at the point of sale. This may mean that you need to create a VAT invoice (a type of invoice that you need to use if you or your customers are VAT-registered). In addition to the entries on a standard invoice, you need to include:  VAT registration number  Tax point (or time of supply)  Total amount excluding VAT  Total amount of VAT  VAT rate charged per-item (plus notes for any exempt items)  If youre using GoCardless, remember that we process payments for the full amount charged to the customer. We dont add VAT on top of this, so if you need to charge your customers for VAT, this should be incorporated into the amount that youre creating payments for. You can learn more in our Transactions and fees FAQs. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.