VAT stands for Value Added Tax and it is a tax payable on most goods and services transactions in the UK and EU. Some items and services are exempt, some are liable for a particular VAT rate.

If you remember, the great ‘Is a Jaffa Cake a cake or a biscuit?’ debate arose out of a VAT classification issue. A cake is VAT exempt, a chocolate coated biscuit is a ‘non-essential luxury’ and so must incur VAT. After a surprising amount of investigating, it was deemed to be a VAT exempt cake. The original list was drawn up in the 70s, when ideas of healthy and non-healthy food were perhaps slightly different. Although many of us do still appreciate cake as an ‘essential’. Jaffa cake anomaly aside, here’s what you need to know about VAT.

Who pays VAT?

The seller of the services or goods pays the VAT to the government. They usually need to pass the cost of this on to their customers and clients.

So, if you are a VAT registered business, you collect and pay the VAT to the government. As a consumer, you are paying VAT within the cost price of the items or services.

Are all goods and services liable for VAT?

No, not all services and goods are liable for VAT. For example: books, specialist equipment for people with disabilities and children’s clothes are all goods that are exempt from VAT.

Services that are not liable for VAT include charities, education providers and financial services.

As a business, how much VAT do I need to pay?

Unless your goods or services are classed are exempt, there are three possible rates of VAT. The one that applies to your business, depends what goods or services you are selling. This rate is applicable to every sales transaction.

  • Zero rate of 0% VAT: to pay on ‘zero-rated’ goods and services. For example, most ‘healthy’ food.
  • Reduced rate of 5%VAT: to pay on some specific good and services. For example, home energy bills
  • Standard rate of 20%: most other goods and services

Do all businesses have to pay VAT?

No, not all businesses are liable to pay VAT. You must register your business for VAT if your VAT taxable, annual turnover is more than £85,000.

Sometimes other businesses choose to be VAT registered, even when they are under this figure, because it is more tax efficient for their particular circumstances.

VAT Refunds

If you are a VAT registered business, you can claim a VAT refund on most of the items you buy for work. You need to maintain the correct paperwork to support your claim and your eligibility depends on the rate of VAT you pay.

Want to know more?

If you’re interested, details like why zero rated VAT exists are in our VAT section.

As a business, it is crucial that you register and pay VAT accurately and on time. Our information includes how to register, filling in a VAT return, what VAT rate you need to apply, financial records requirements and HMRC deadlines.