What is VAT and how is a VAT return calculated?
VAT stands for Value Added Tax and is a tax charged to the final consumer of a product.
When you buy goods you will often notice that you have VAT itemised on your receipt, along with an increase in price.
Value Added Tax in the UK
This is normally charged at 20% of the product’s cost. For example, a £100 product would have £20 value-added tax, therefore you pay £120 in total. The business that you pay for the item (at a later date) will pay the collected value-added tax to HM Revenue and Customs.
Not everything is liable to VAT at 20%. Some things have no VAT to pay on them at all.
What are the three rates of VAT?
In the UK, there are three rates of VAT. These are:
- Standard rate at 20%
- Reduced rate at 5%
- Zero Rate at 0%
The 0% rate is mainly reserved for items considered essential. These are things like simple food and clothes for babies. This helps to ensure these products are more affordable.
The reduced 5% rate is usually for beneficial items such as utilities that provide heat and power to a home or some non-essential medical products like nicotine patches.
A standard rate is applied to almost everything else considered a luxury item. These include cooked food, toys, tools and many other products.
If you would like to know more about which items are charged at which VAT rate, then you can find a list by clicking this link.
You may notice some items have “exempt” next to them. This means VAT is never charged on them, not even at 0%.
We hope the above has given you a greater understanding of value-added tax, but if you have any questions, please do not hesitate to contact us.

Adam is our managing director and a fully AAT-certified accountant. Adam founded Short Accounting in 2014 with the aim of helping business owners with their accounting and tax needs so that they can focus on growing and managing their businesses.
Over the years Adam has helped thousands of SMEs, sole traders, limited companies and more with the full range of accounting services. He’s a firm proponent of adopting the latest in accounting tech to help streamline processes to ensure that all of our clients get the best service possible.

