Value Added Tax (VAT) is an indirect tax placed on the sale of most goods and services in the UK. It's called ‘indirect’ because it isn't paid straight to the government by the end customer — it's collected by VAT-registered businesses on HMRC's behalf, built into the price you pay at the till or on the invoice.
Current VAT Rates in the UK
The standard rate of VAT on most purchases is 20%. This covers the majority of goods and services sold across the country. However, there are three other rates and categories worth knowing about.
| Rate | What It Covers |
|---|---|
| 20% – Standard | Most goods and services — the default rate if nothing else applies |
| 5% – Reduced | Home energy products and children's car seats |
| 0% – Zero-Rated | Most food, children's clothing, books, newspapers, and sanitary products |
| Exempt | Postage stamps, financial services and property transactions |
To add or remove VAT at any of these rates on a specific amount, use the VAT calculator above.
History of VAT in the UK
VAT was introduced in the UK in 1973, shortly after the UK joined the European Economic Community (now the European Union). It replaced the older ‘Purchase Tax’, which had been in place since 1940.
The standard rate has changed multiple times since then, reflecting the differing political and economic priorities of each government. While the UK was an EU member, the standard rate couldn't legally be set below 15% — a rule that no longer applies now that the UK has left the EU, though the rate has remained at 20% since 2011.
| Period | Standard Rate |
|---|---|
| 1973–1974 | 10% |
| 1974–1979 | 8% |
| 1979–1991 | 15% |
| 1991–2008 | 17.5% |
| 2008–2009 | 15% |
| 2009–2011 | 17.5% |
| 2011–present | 20% |
Who Has to Register and Pay VAT?
Any business with a taxable turnover higher than £90,000 in any rolling 12-month period must register and pay VAT on all goods and services it sells. This threshold rose from £85,000 to £90,000 on 1 April 2024, so if you've seen the older £85,000 figure elsewhere, it's out of date.
Once registered, the VAT a business charges its customers is collected on their behalf and paid over to HM Revenue & Customs (HMRC), usually every quarter.
How Do You Pay VAT?
There are several ways VAT-registered businesses can pay their VAT bill to HMRC. Which one you choose affects how much notice you need to give before the deadline, since some methods clear same-day and others take a few working days.
Same or Next-Day Payment Methods
- Online or telephone banking (Faster Payments) — usually clears the same or next day.
- CHAPS (Clearing House Automated Payment System) — same-day clearing, typically used for larger payments.
Payment Methods That Take Up to 3 Working Days
- Direct Debit — HMRC collects automatically, typically 3 working days after your filing deadline, provided the mandate is set up in time.
- BACS (Bankers Automated Clearing Services).
- Standing order — only available if you're on the VAT Annual Accounting Scheme or making Payments on Account.
- Debit or corporate credit card online — note that personal credit cards are no longer accepted for VAT payments.
- At a bank or building society.
The VAT Payment Deadline
Your VAT return and payment are both due one calendar month and 7 days after the end of your VAT accounting period — for example, a quarter ending 30 June is due by 7 August.
Important: this deadline does not move for weekends or bank holidays. If your deadline falls on a non-working day, your payment still needs to clear HMRC's bank account by that date — which in practice means sending it a working day or two earlier if you're not using a same-day method like Faster Payments.
What Happens If You Pay VAT Late?
HMRC uses a points-based penalty system for late VAT returns, alongside separate, escalating penalties for late payment:
- Up to 15 days late: no penalty, provided you pay in full or agree a Time to Pay arrangement with HMRC.
- 16 to 30 days late: a first penalty begins to accrue.
- 31 days or more late: a higher first penalty applies, plus a second penalty that builds daily until the bill is paid in full.
Late-payment interest also runs from the original due date until the bill is cleared, charged at the Bank of England base rate plus a margin.
Separately, missing return deadlines (even if payment is on time) builds up penalty points — accumulate enough points and a flat £200 penalty follows, with another £200 for each further late return after that, until your points reset by filing on time for 24 consecutive months.
VAT Payments on Account (Large Businesses)
If your business's VAT liability exceeds £2.3 million in any 12-month period, HMRC moves you onto the Payments on Account (POA) regime automatically — this is separate from, and in addition to, your normal quarterly VAT return.
Under POA, you make two advance instalments during each VAT quarter — each equal to roughly 1/24th of your previous year's annual VAT liability — due on the last working day of the second and third months of the quarter. A balancing payment then settles the difference when you file your actual VAT return.
If your VAT liability later falls back below £2.3 million, HMRC will remove you from the POA arrangement around 6 months after your reference year confirms the drop.
Getting Your VAT Invoicing Right
It's important that VAT is added to goods and services correctly from the start — this is what makes filing an accurate VAT return straightforward rather than a scramble at quarter-end.
Every VAT invoice should use the correct format, including an invoice number, the invoice date, your VAT registration number, your customer's details, and a clear description of the goods or services provided. Each line item should show the unit price excluding VAT, the quantity, the VAT rate applied, the VAT amount, and any discounts given.
Getting this right at the point of sale avoids two common problems: invoices that HMRC or your accountant later query, and a VAT return that takes far longer to prepare than it should.
Sources
- HMRC — VAT rates on different goods and services (gov.uk)
- HMRC — Register for VAT (gov.uk)
- HMRC — Pay your VAT bill (gov.uk)
- HMRC — VAT payments on account, Notice 700/60 (gov.uk)
- HMRC — Penalties for late VAT returns and payments (gov.uk)
This page is for general information only and does not constitute tax advice. Rates, thresholds and penalty rules can change — always confirm current figures with HMRC or a qualified accountant.