VAT trips up more UK small businesses than almost any other tax, usually because the rules sound simpler than they are. The headline rate (20%) is easy to remember, but knowing which items drop to 5%, which sit at 0%, and which are exempt entirely is where mistakes and missed reclaims happen. This guide covers the four VAT categories, the registration threshold, what a compliant VAT invoice must show, and the schemes worth knowing about.
What are the four UK VAT rates?
The UK has four VAT categories. Three are actual rates (20%, 5%, 0%) and the fourth, exempt, sits outside the VAT system. The main rates have not changed since 2011, but the list of which goods and services fall into each band is updated by HMRC, so check borderline items against the GOV.UK rates list.
| Category | Rate | Common UK examples |
|---|---|---|
| Standard | 20% | Most goods and services, professional fees, electronics, adult clothing, restaurant meals |
| Reduced | 5% | Domestic energy (gas and electricity), children's car seats, sanitary products, mobility aids for the elderly |
| Zero-rated | 0% | Most food, children's clothes and shoes, books, newspapers, printed maps, public transport |
| Exempt | — | Insurance, postage stamps, most financial services, education and training, betting |
If you cannot work out which band something falls into, the safe assumption is standard rate. Most of the cases where a lower rate applies are specific exceptions written into law, not the default. Our help guide on UK VAT rates walks through the trickier line items.
What's the difference between zero-rated and exempt?
Zero-rated and exempt both mean the customer pays no VAT, but they are treated very differently and confusing them causes real problems on your VAT return.
Zero-rated supplies are taxable, just at a rate of 0%. They count as taxable turnover, they appear on your VAT return, and because they are taxable you can reclaim the input VAT on costs that relate to them. A bookshop selling zero-rated books still recovers VAT on its rent, tills and stationery.
Exempt supplies are outside the VAT system entirely. They do not count towards your taxable turnover for the registration threshold, and you generally cannot reclaim input VAT on costs linked to making them. A standalone insurance broker making only exempt supplies usually cannot register for VAT or recover input tax at all.
The practical upshot: if you sell zero-rated goods you usually want to be VAT registered, because you charge no output VAT but reclaim input VAT, which often produces a repayment from HMRC. If you make exempt supplies, registration brings no such benefit.
When do I have to register for VAT?
You must register for VAT once your taxable turnover goes over £90,000 in any rolling 12-month period. This is not a calendar-year or tax-year figure. At the end of every month you look back over the previous 12 months, and if the running total of taxable turnover has crossed £90,000 you must register. You also have to register if you expect to go over £90,000 in the next 30 days alone.
The threshold has been £90,000 since April 2024. The deregistration threshold sits at £88,000, so if your taxable turnover drops below that you can apply to come out of VAT. The full rules and timing are on GOV.UK's when to register page.
Voluntary registration is allowed below the threshold and can be worth it. If most of your customers are VAT-registered businesses (who reclaim the VAT you charge anyway) and you have meaningful input VAT to recover, registering early can put cash back in your pocket. It also avoids the awkward jump where your prices appear to rise 20% the moment you cross the threshold. The trade-off is more admin and the obligation to file returns. If you're weighing it up, our guide on whether you need to charge VAT goes deeper.
What must a VAT invoice show?
Once you're VAT registered, every VAT invoice has to show a specific set of details. Leaving items off can invalidate the invoice for your customer's reclaim, so this list matters. Per HMRC's VAT invoice rules, a full VAT invoice must include:
- A unique, sequential invoice number
- Your business name, address and VAT registration number
- The invoice date, and the tax point (supply date) if it differs
- The customer's name and address
- A description of the goods or services supplied
- The quantity of each item
- The unit price excluding VAT
- The VAT rate charged per item
- The total amount excluding VAT
- The total VAT charged
- The total amount including VAT
If you're not VAT registered, you still issue invoices, just without any VAT details. A non-VAT invoice needs a unique identifying number, your name (or trading name) and address, the customer's name and address, a clear description, the date the goods or services were supplied, the date the invoice was issued, and the amount due. Sole traders must show their own legal name as well as any business name they trade under. The general rules are set out on GOV.UK's invoicing page.
Invoify's editor builds the full VAT invoice layout for you, applies the correct rate per line, and totals the VAT automatically, with all four UK rates pre-loaded through its UK VAT support. You don't have to memorise the field list above.
Is the VAT Flat Rate Scheme worth using?
The Flat Rate Scheme can simplify VAT for smaller businesses, but it isn't always cheaper. It's open to businesses with a VAT taxable turnover of up to £150,000 (excluding VAT). Instead of working out VAT on every sale and purchase, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover. The flat-rate percentage depends on your trade sector.
The catch is that you usually cannot reclaim the VAT on your purchases, apart from a limited exception for certain capital assets costing £2,000 or more in one go. There's a 1% discount on your flat-rate percentage for the first year after you register for VAT, which makes the early period more attractive.
The scheme tends to suit service businesses with low VAT-bearing costs. If you buy a lot of standard-rated stock or equipment, the standard method of reclaiming actual input VAT is often better. Full eligibility and the sector percentages are on GOV.UK's Flat Rate Scheme page.
What is Making Tax Digital for VAT?
All VAT-registered businesses must follow Making Tax Digital (MTD) for VAT. That means keeping your VAT records digitally and submitting your VAT returns through MTD-compatible software, rather than typing figures into the old HMRC online form. Paper records and manual portal submissions are no longer compliant for VAT.
In practice you need software that can store the digital records and connect to HMRC's systems to file. The official guidance, including the list of compatible software, is published under Making Tax Digital. MTD is the main reason it's worth getting your invoicing and bookkeeping onto a digital system early, well before you near the registration threshold.
A quick note on the construction reverse charge
If you work in construction, there's an extra wrinkle: the VAT domestic reverse charge. For many building and construction services supplied between VAT-registered businesses, the customer accounts for the VAT to HMRC rather than the supplier charging it. The supplier issues an invoice noting that the reverse charge applies and shows the VAT that the customer must account for, but does not collect that VAT itself.
This sits alongside the Construction Industry Scheme (CIS) and catches a lot of subcontractors out. The detail is on GOV.UK's reverse charge guidance. If construction is your trade, our piece on CIS invoices for subcontractors covers how the deductions and VAT interact.
Getting your VAT invoicing right
VAT errors usually come from two places: charging the wrong rate, and leaving required details off the invoice. Pre-load the correct rates, apply them per line, and let the software handle the totals and the mandatory fields. That removes most of the risk.
Invoify ships with all four UK VAT rates built in and produces HMRC-compliant VAT invoices out of the box, with a free plan you can start on and Pro from £7.99/month if you outgrow it.
This article is general guidance, not tax advice. VAT rules and rates change, and your circumstances may differ. Check the linked GOV.UK pages or speak to an accountant before acting.