The UK’s Value Added Tax (VAT) system affects everyone who buys goods and services. Here’s what you need to know about VAT rates and how they work.
Current VAT Rates in the UK
In the tax year 2025/26, the UK has three VAT rates. The different rates are shown in the table below:
| Rate Type | Percentage | Applies To |
|---|---|---|
| Standard Rate | 20% | Most goods and services |
| Reduced Rate | 5% | Domestic fuel, children’s car seats |
| Zero Rate | 0% | Essential items |
How VAT Works
VAT is a tax you pay when you buy products and services. The business adds it to the price before you pay. For example, if something costs £100 before VAT:
- At 20% VAT, you pay £120
- At 5% VAT, you pay £105
- At 0% VAT, you pay £100
UK VAT Rates – What Gets Taxed at Each Rate
The standard rate of 20% applies to most goods and services. A reduced rate of 5% is applied to certain products and services. Many essential items benefit from a 0% rate, while certain goods and services are exempt.
Standard Rate (20%)
The standard VAT rate of 20% applies to most goods and services in the UK.
The rate has been in effect since 2011, when it increased from 17.5%.
Items subject to the standard rate include:
- Consumer electronics – PCs and laptops, mobile phones, game consoles, and home appliances
- Adult clothing and accessories – Clothes, shoes, fashion accessories, and jewellery
- Home and furniture – Furniture, home decorations, and carpets.
- Services – Consulting services, legal services, accounting services
- Luxury items – Cosmetics and perfumes
- Non-essential food and drink – Alcohol, confectionery, crisps, hot takeaway food, and soft drinks
Reduced Rate (5%)
The reduced VAT rate of 5% applies to specific goods and services considered essential or socially beneficial.
- Energy and power – Gas and electricity for household use, heating oil for residential properties, solar panels and wind turbines, ground source heat pumps
- Children and mobility – Children’s car seats and booster seats, installed mobility aids for people over 60 (e.g. grab rails, ramps, and stair lifts)
- Health and welfare products – Smoking cessation products (nicotine patches, gum), sanitary protection products, and incontinence products
- Property and construction – Residential property renovations (for properties empty 2+ years), converting buildings into residential properties, and home adaptation for disabled people
This reduced rate helps make essential items and services more accessible while maintaining VAT recoverability for businesses.
Zero Rate (0%)
Zero-rated items are technically still VAT-taxable but at 0%. This differs from VAT-exempt items because businesses can reclaim VAT on costs related to these sales.
- Essential food and drink – Bread, fruit, vegetables, meat, fish, milk and dairy products, eggs, tea, coffee etc.
- Children’s items – Clothing and footwear for children, and school uniforms
- Health and medical – Prescription drugs and medicines dispensed by a registered pharmacist, and medical equipment for disabled people (e.g. wheelchairs and hearing aids)
- Publications and learning – Books and booklets, newspapers and magazines, maps and charts, academic journals, sheet music, and educational texts
- Building and construction – Construction of new residential buildings, and construction of buildings for charitable purposes
- Utilities – Water supplied to households and sewerage services
- Transport – Public transport fares and international freight transport
- Special categories – Exports to countries outside the UK
This zero rate helps make essential items more affordable while allowing businesses to reclaim VAT on their related costs, unlike VAT-exempt items, for which no VAT can be reclaimed.
VAT-Exempt Items
Some things don’t have VAT at all. These are different from zero-rated items because businesses can’t claim back VAT on costs related to them. These include:
- Financial services – Banking services and transactions, credit and lending services, insurance services and policies, investment management, stock and share dealings, money transfer services, and foreign exchange
- Education and training – Courses provided by eligible institutions, university tuition, vocational training by recognised bodies
- Healthcare services – Medical care by registered professionals, dental treatment, optometry services, and services provided by registered pharmacists
- Charitable activities – Admission charges to charitable events, fundraising events by charities, welfare services provided by charities, and donated goods sold by charity shops
- Postal services
- Cultural services – Museum and gallery admission (public bodies)
- Membership organisations – Professional body subscriptions, trade union subscriptions, sports club memberships (non-profit), religious organisation memberships, and community association fees
VAT on property and land transactions is complex and depends on the type of property, its use, and any elections made by the seller or landlord. For example:
- The sale of freehold land, including many commercial buildings, is generally exempt from VAT, unless the vendor has opted to tax the property
- Similarly, leasing of commercial property is normally VAT-exempt; however, if the owner has made an option to tax, VAT is charged (usually at the standard rate) but enables recovery of related input tax
- Residential rent and lettings are typically exempt from VAT
This exemption system helps keep essential services more affordable.
Products and Services Outside the Scope of VAT
Products and services that are outside the scope of VAT are fundamentally different from zero-rated or exempt items. These transactions fall entirely outside the VAT system.
- Government and statutory charges – MOT testing fees, vehicle scrappage schemes, congestion charges, bridge and tunnel tolls operated by public authorities, and statutory fees and levies
- Employment and wages – Salaries and wages, statutory redundancy payments, and compensation payments
- Charitable activities – Genuine donations where nothing is received in return, low-cost welfare services provided by charities, grant funding (when no benefits are received in return)
- International services – Services provided to businesses outside the UK (under place of supply rules), services to overseas clients, services related to land outside the UK, and international freight transport services
- Business transfers – Transfer of a business as a going concern (TOGC), share sales, and company acquisitions
For such items:
- No VAT is charged on these items
- Transactions are not reported in VAT returns
- Businesses cannot reclaim VAT on related costs
Historical VAT Rates
Historic rates of VAT in the UK are shown in the table below:
| Year | Standard VAT Rate | Higher VAT Rate | Reduced VAT Rate |
|---|---|---|---|
| 1973-74 | 10% | – | – |
| 1974-76 | 8% | 25% | – |
| 1976-79 | 8% | 12.50% | – |
| 1979-92 | 15% | – | – |
| 1992-94 | 17.50% | – | – |
| 1994-97 | 17.50% | – | 8% |
| 1997-2009 | 17.50% | – | 5% |
| 2009-10 | 15% | – | 5% |
| 2010-11 | 17.50% | – | 5% |
| 2011 onwards | 20% | – | 5% |
Rules for Businesses
If a business has a taxable turnover more than the VAT registration threshold (£90,000 in 2025/26), it must register for VAT and:
- Charge output VAT on sales
- Send VAT returns to HMRC (usually quarterly)
- Keep VAT records
- Input VAT can be reclaimed if the goods or services purchased are used to make taxable supplies
A business’s VAT liability is calculated by subtracting the input tax from the output tax. If the output tax exceeds the input tax, the difference is paid to HMRC (usually quarterly).
Conversely, if the input tax exceeds the output tax, the business can claim a VAT refund from HMRC.
Important Considerations for Businesses
Businesses should consider if special rules apply. For complete and up-to-date guidance on all aspects of VAT for businesses, please refer to the official HMRC website.
Partial Exemptions
Businesses that make both taxable and VAT-exempt supplies are considered ‘partially exempt.’ For example, a hospital gift shop that sells taxable items like greeting cards but also provides VAT-exempt healthcare services would need to calculate input tax reclaimable for its taxable activities. Such businesses must carefully calculate how much input tax they can reclaim. The calculations can be complex and often require specialised accounting advice.
Digital Services
The ‘place of supply’ rules for digital services can be complex and depend on whether the customer is a business or consumer and where they are located. Businesses selling digital products or services to overseas customers must know these rules.
Specific VAT Schemes
Several optional schemes can simplify VAT accounting for businesses. These include the Flat Rate Scheme (for smaller businesses) and the Cash Accounting Scheme (allowing VAT to be accounted for when payment is received, not invoiced).
VAT and Imports
When a business imports goods into the UK from outside the UK, it may be liable to pay import VAT. Depending on the circumstances, the VAT may be collected by the shipping company or directly by HMRC. Businesses can reclaim this VAT provided the goods are used for taxable supplies.
