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UK VAT Explained: Registration Threshold, Rates and How to Calculate It Correctly

Last reviewed October 8, 2026. Thresholds and rates are taken from GOV.UK guidance; the examples are our own calculations. Sources are listed at the end.

If you sell goods or services in the UK, sooner or later you meet VAT. For a small business the key questions are simple but easy to get wrong: when must I register, what do I charge, how do I work the figures out, and what can I get back? This guide answers each with examples. You can check any calculation in our UK VAT calculator.

The three UK VAT rates

GOV.UK sets out three rates:

  • Standard rate: 20%. Applies to most goods and services.
  • Reduced rate: 5%. Applies to certain items, such as child car seats and domestic fuel and power.
  • Zero rate: 0%. Applies to certain items, such as most food and children's clothes.

Zero-rated sales are still VAT-taxable supplies, charged at 0%, and must appear on your VAT return. Some supplies are exempt, which is different. The rate that applies depends on what you sell, so check the GOV.UK guidance for your product.

When you must register

You must register for VAT if your VAT taxable turnover exceeds £90,000, according to GOV.UK. There are two tests:

  • The backward-looking test: if your taxable turnover for the previous 12 months, counting on a rolling basis, goes above £90,000, you must apply within 30 days of the end of the month in which you crossed it. Your registration is effective from the first day of the second month after you crossed the threshold.
  • The forward-looking test: if you expect your taxable turnover to exceed £90,000 within the next 30 days alone, you must register by the end of that 30-day period. The effective date is the day you realised it.

Below the threshold, you can register voluntarily. That may be worthwhile if most of your customers are VAT-registered businesses and you want to reclaim VAT on your costs.

What registered businesses must do

Once registered, you must charge VAT on your sales unless they are exempt, show it on your invoices, keep a VAT account and submit VAT returns. A VAT invoice needs your VAT number and the VAT shown separately from the price. GOV.UK also says VAT-registered businesses are signed up to Making Tax Digital for VAT.

How to add VAT to a price

To add VAT, multiply the net price by 1 plus the rate.

Example (20%): you charge £400 for a service.

  • VAT = 400 × 0.20 = £80
  • Total = 400 × 1.20 = £480

At the 5% reduced rate, multiply by 1.05 instead.

How to remove VAT from a price

To find the net price from a price that already includes VAT, divide by 1.2 for the standard rate or 1.05 for the reduced rate. GOV.UK's own example does exactly this.

Example: a £180 purchase including 20% VAT.

  • Net price = 180 ÷ 1.2 = £150
  • VAT = 180 − 150 = £30

The common mistake is taking 20% of 180, which gives £36 and is wrong. The 20% was added to the net price, so the VAT is one sixth of the VAT-inclusive total, which is £30.

Reclaiming VAT on purchases

A VAT-registered business can usually reclaim the VAT it pays on business purchases (called input VAT), and it pays HMRC the difference between the VAT it charged customers (output VAT) and the VAT it can reclaim.

Example: over a quarter, you sell goods for £10,000 net.

  • Output VAT charged to customers: 10,000 × 20% = £2,000
  • You bought supplies for £4,000 net, paying 20% VAT: £800 of input VAT
  • You owe HMRC: 2,000 − 800 = £1,200

If your input VAT is larger than your output VAT for the period, you can claim a refund. Which business expenses qualify has its own rules, so check the GOV.UK guidance on reclaiming VAT.

Practical tips for small businesses

  1. Track turnover monthly. The 12-month test is rolling, so you can cross the threshold in any month.
  2. Keep records. Invoices, receipts and a VAT account are required.
  3. Price carefully. If you register, either your prices go up by 20% or your take-home from each sale falls. Decide before you cross the threshold.
  4. Check the rate on each product. Mixed baskets of 20%, 5% and 0% items need line-by-line treatment.
  5. Separate VAT from income. VAT you collect is not yours. Hold it aside for the return.
  6. Use the right rounding. Calculate on the unrounded figure and round the final line.

Quick answers

Is VAT charged on the whole price or on shipping? Delivery charges are generally part of the supply and take the same rate as the goods, but check the guidance for your case.

Do I charge VAT if I am under the threshold? No, unless you register voluntarily.

What is the difference between zero-rated and exempt? Zero-rated sales are taxable at 0%, and you can reclaim the VAT on your costs. Exempt sales are outside VAT, and you generally cannot reclaim related VAT.

Does the same VAT apply in other countries? Rates and thresholds are different elsewhere in Europe. We explain several of them in how to add and remove VAT.

How we checked these numbers

We read the thresholds, the rates and the registration rules from GOV.UK, then recalculated the examples with a script and tested them in our calculator. Rates and thresholds change, so check GOV.UK before relying on a figure.

This article is general information and not tax advice. Your situation may differ. Speak to HMRC or an accountant for decisions about registration and returns.

Sources