The standard VAT rate is 20% in the United Kingdom, which applies to most goods and services. Other countries set their own rates, ranging from as low as 5% to as high as 27%. VAT (value added tax) is a consumption tax added at each stage of production and sale, ultimately paid by the end consumer.
UK VAT Rates
The UK uses three VAT rates:
- 20% (standard rate): Applies to most goods and services you buy, from electronics and clothing to restaurant meals and professional services.
- 5% (reduced rate): Covers a smaller group of items, including children’s car seats, home energy costs, and certain sanitary products.
- 0% (zero rate): Applies to essentials like most food, children’s clothing, books, and prescription medications. Zero-rated items are technically still within the VAT system, which matters for businesses (more on that below).
Some goods and services are VAT-exempt entirely. These include financial and insurance services, education, medical and dental care, and certain property transactions. The distinction between “zero-rated” and “exempt” may seem academic, but it has real consequences for businesses. A business selling zero-rated goods can still reclaim the VAT it paid on its own supplies and expenses. A business selling only exempt goods cannot.
VAT Rates Around the World
More than 170 countries charge some form of VAT or goods and services tax. The EU requires all member states to set a standard rate of at least 15%, and most land between 19% and 25%. Hungary has the world’s highest standard VAT rate at 27%. Denmark, Norway, and Croatia each charge 25%, while Finland sits at 25.5%.
On the lower end, several countries in the Middle East and Asia charge just 5%, including the United Arab Emirates, Oman, and Taiwan. Switzerland and Liechtenstein charge 8.1%, and Singapore charges 9%. The United States is a notable exception: it has no national VAT, relying instead on state and local sales taxes.
How VAT Is Calculated on a Purchase
If you’re buying something in the UK at the standard rate, the VAT adds 20% to the pre-tax price. A product listed at £100 before tax costs £120 after VAT. Most prices you see in UK shops already include VAT, so you’re paying it without doing any math yourself. Business invoices, on the other hand, often show the VAT as a separate line item.
At the reduced rate, a £100 item would carry £5 in VAT for a total of £105. Zero-rated items carry no VAT at all, so the price stays at £100.
When Businesses Must Charge VAT
Not every business charges VAT. In the UK, you must register for VAT if your taxable turnover exceeds £90,000 over any 12-month period, or if you expect it to cross that threshold within the next 30 days. Once registered, you’re required to charge VAT on your sales, file regular VAT returns, and pay the collected tax to HMRC.
Businesses below the £90,000 threshold can register voluntarily. This sometimes makes sense for companies that sell zero-rated goods, since registration lets them reclaim VAT on their business expenses while charging 0% to customers. For businesses selling standard-rated goods to price-sensitive consumers, staying unregistered keeps prices lower.
Overseas businesses that supply goods or services to the UK must also register for VAT regardless of their turnover level.
Zero-Rated vs. Exempt: Why It Matters
Both zero-rated and exempt goods result in no VAT being charged to the buyer, but the difference is significant for the seller. A bakery selling bread (zero-rated) can reclaim the VAT it paid on flour, energy, and equipment. A private school providing education (exempt) cannot reclaim VAT on its supplies, which effectively makes those costs higher.
Common zero-rated items include most unprocessed food, water and sewage services, children’s clothing, books, exported goods, and equipment for disabled people. Common exempt categories include insurance, financial services, postal services, burial and cremation, and membership subscriptions to certain organizations.
If you run a business that sells a mix of taxable and exempt goods, you can only reclaim a portion of the VAT on your expenses, calculated based on the ratio of taxable to exempt sales. This is known as partial exemption and adds complexity to your VAT returns.