Value Added Tax (VAT)
An indirect tax charged on the supply of goods and services at each stage of production and distribution. Standard rate: 20%. Reduced rate: 5%. Zero-rated supplies are taxable but at 0%.
Independent editorial summary — not the official statute text. Read the official version on legislation.gov.uk.
Value Added Tax is an indirect tax charged on the sale of most goods and services in the UK. Businesses registered for VAT charge it on their taxable supplies and can generally reclaim the VAT they have paid on their own business purchases, so that the tax is ultimately borne by the final consumer. The rate of VAT that applies depends on the particular goods or services being supplied.
The standard rate of VAT is 20%, and applies to most goods and services. A reduced rate of 5% applies to some goods and services, for example children's car seats and home energy. A zero rate of 0% applies to zero-rated goods and services, for example most food and children's clothes; these supplies are still within the VAT system and must be recorded, but no VAT is actually charged on them. The standard rate has not always been 20%: it increased to 20% on 4 January 2011, having previously stood at 17.5%.
Certain supplies fall outside these rates altogether because they are exempt from VAT, such as postage stamps and many financial and property transactions; exempt supplies are treated differently from zero-rated ones because a business making only exempt supplies generally cannot register for VAT or reclaim input tax.
Example
A shop selling both adult clothing and children's clothing will normally charge 20% VAT on the adult items but 0% on the children's clothing, because children's clothes are zero-rated.
Related terms
Official sources
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