How much is VAT for small businesses?

Value-added tax (or VAT) is an important area for businesses to get right. You only need to pay VAT if your annual turnover is above £85,000. Still, it’s good to know how VAT works if you plan to grow your business to eventually reach that number.

To help you understand how much VAT is for different sectors and products, this guide will cover:

• What is VAT?
• How much is VAT for different products and services?
• How do I know what sales are VAT taxable?
• When does VAT not apply?
• The difference between zero-rated and VAT-exempt items

Whether you’re a sole trader or small business owner, Countingup has a range of tips and tools to help you manage your business effectively.

VAT is a general tax placed on almost all goods and services sold, where consumers pay a tax on the products they buy based on the product’s value. VAT rates are percentage based, meaning the greater the price, the more the consumer pays.

What is the VAT rate for different sectors? VAT falls within three different rates: standard, reduced, and zero rate. We’ll go over each one individually below:

Most sales of products and services in the UK fall into the standard rate of 20% VAT. 

People can often get confused about how to charge VAT on food and drink. Most food and drink is zero-rated for VAT (explained below), but there are a few exceptions that customers have to pay the standard rate on. These include:

• catering and hot food (including hot takeaways)
• snacks such as crisps, confectionery and ice cream
• alcoholic drinks
• soft drinks
• sports drinks

Some goods and services fall into the reduced rate, meaning the customer only has to pay 5% VAT. These include but are not limited to:

• Domestic gas and electricity
• Children’s car safety seats
• Products to help people quit smoking
• Mobility aids for the elderly, such as rollators

The government has also introduced a reduced VAT rate for businesses in hospitality and tourism as a response to the coronavirus. This reduced rate of 5% will stay in place until 30th September 2021 to help these businesses stay afloat during the pandemic. 

The government will also introduce an interim rate of 12.5% from 1st October 2021 to 1st April 2022. After that, they will begin charging the standard VAT rate again.

We have create an easy-to-use vat calc to help you see the effect of different VAT rates.

Finally, some products and services are zero-rated for VAT, meaning no VAT is paid or can be reclaimed on them. However, while customers pay 0% VAT, these goods and services are still considered VAT taxable, meaning you still have to report them as such to HMRC.

Zero-rated goods and services include:

• baby and children’s clothes
• printed materials, such as books, magazines and newspapers
• travel fares, such as flights and train tickets

This list may seem straightforward, but there are some exceptions you need to know about. 

For example, while printed material is zero-rated, letterheads and posters are actually standard-rated. Additionally, even though travel is zero-rated, parking tickets are standard-rated. 

You can check HMRC’s website or ask your accountant (if you have one) if you’re confused about what VAT rate applies where. 

Finding out if the products or services you sell are subject to VAT is relatively simple. To check if your sales exceed the VAT threshold of £85,000 for any 12-month period, you simply add up your standard-rated, reduced-rated and zero-rated sales. 

Remember to always include your zero-rated items since they are still subject to VAT. You can only leave out VAT-exempt items, which we’ll explain more about later.

If the total amount of your VATable sales is over £85,000 or is due to go over the threshold within a 12-month period, you need to register your business for VAT.

Some products and services are exempt from VAT. These include:

• Education or training
• Charitable fundraising
• Selling or letting commercial properties
• Insurance and finance services
• Postage stamps

You can find more information about when VAT applies and at which rate on the government website.

You’re probably wondering how VAT-exempt and zero-rated products or services differ from each other since 0% technically means the customer doesn’t pay anything extra. The difference is whether you can register for VAT and reclaim the product/service.

If your business only sells VAT-exempt goods or services, you can’t register for VAT, meaning you can’t reclaim the VAT charged by your own suppliers. But if you sell zero-rated products/services, you can still register and reclaim the VAT your suppliers charge you –– even if you don’t charge VAT yourself.

However, calculating VAT can be tricky if you sell a mix of zero-rated and exempt products/services. You or your accountant will have to establish how much VAT you can reclaim on supplied items based on how much they contribute to delivering your own VAT-able items.

Some companies (usually larger corporations) may offer a range of standard, reduced, zero-rated and exempt products or services. These companies need to account for all items to reclaim the correct amount of VAT.

VAT can quickly get complicated, so it may be wise to hire an accounting professional to manage your VAT taxes for you. If you set up a business current account with Countingup, we offer a designated accountant hub that helps your accountant keep track of your finances efficiently.

In this case, your business has no obligations to register for VAT services. However, you can still register voluntarily to the relevant VAT scheme for your business if you wish to do so. Being registered for VAT can help build your business’ image and brand, as this type of credibility can be deemed desirable to potential customers.

When you sign up for a Countingup business current account, you get free built-in accounting software that allows you and your accountant to keep track of your books with ease. 

We’ve automated the time-consuming aspects of bookkeeping and tax planning, so you can focus on running your business. You also receive updates about profit and loss statements, cash flow insights, tax estimates and unpaid invoices. 

Keep your finances running like clockwork. Download the Countingup app today.