Value Added Tax (VAT) is a tax that businesses charge on most of the goods and services they sell. In the UK, the standard rate of VAT is 20%, with a reduced rate of 5% for some items (such as children’s car seats) and 0% for many essentials (like most food and drink). Any business whose taxable turnover exceeds £90,000 must register for VAT and start charging it.
Essentially, almost anything your business sells will incur VAT unless it’s specifically exempt. For example, HMRC guidance lists goods and services, equipment hire, asset sales, commissions, staff canteen sales, and barter/exchange transactions as taxable supplies.
Goods and services
Most products and services sold by a VAT-registered company are taxable. By default, the standard 20% rate applies to these supplies. For example, a manufacturer selling handbags or an accountant billing for time would charge 20% VAT. There are exceptions: some items are taxed at reduced or zero rates.
For instance, children’s car seats are taxed at 5%, and many basic food and drink items are 0%. But if a sale isn’t explicitly zero-rated or exempt, the standard 20% rate applies.
Hiring or loaning equipment
If your business rents or hires out tools, vehicles or machinery, VAT is charged on those fees. Hiring equipment is treated like a supply of services, so any rental or leasing income must include VAT (usually at 20%).
For example, a construction firm leasing cranes or a party planner renting sound systems must charge VAT on the rental fee. Even deposits or incidental fees related to hires can have VAT implications, since they form part of the taxable supply.
Selling business assets
When a company sells off a business asset (such as used machinery, a company car, or office furniture), that sale is normally subject to VAT. You must account for VAT on the sale price of the asset, just as if you were selling a new product. For example, if a business sells a vehicle it used, it must add VAT at the standard rate to the invoice. (Special margin schemes can apply to second-hand goods, but the default is to charge VAT on the full sale value.)
Commission and fees
VAT applies to any commission, brokerage or consulting fee your business earns. If you receive payment as an agent, broker or advisor (for instance, a sales commission or referral fee), that income is a taxable supply.
You would charge VAT on the commission invoice to your client, as long as the service isn’t exempt. In other words, any fee you charge customers for a business service will generally carry VAT.
Employee and personal benefits
VAT can also arise on internal transactions. For example, if you sell items to your employees (like meals in a staff canteen or discounted goods), those sales are treated as taxable supplies. Similarly, if the business provides an asset (car, laptop, etc.) for personal use by an owner or employee, you may need to account for VAT on that benefit. In practice, giving goods or services to staff or using company resources privately typically creates a notional VAT supply for accounting purposes.
Non-cash transactions
Even without cash changing hands, VAT can apply. If your business swaps products or services with another business (barter), each party must account for VAT on what they receive. Likewise, if the business gives away goods or equipment as a gift, HMRC treats it as a supply at market value. In short, barter or exchange transactions by your business count as taxable supplies.
Shipping and postage
When you charge customers for shipping or postage, that fee includes VAT. If you invoice for delivery, packaging or handling, you must add VAT on those costs. (Royal Mail postage stamps are VAT-exempt, but reselling stamps or shipping services to a customer is taxable.) In practice, you apply VAT to shipping at the same rate as the goods shipped: if you ship standard-rated items, charge 20% on the shipping fee; if you ship zero-rated goods, the shipping is also 0%.
Utilities and energy
Business utilities carry VAT, too. In particular, electricity and gas are standard-rated for most businesses: VAT is charged at 20% on commercial energy bills. (Only certain low-usage businesses or charities qualify for the 5% reduced energy rate.) Other services like water, waste, telephone and internet are generally taxed at 20% as well. Essentially, if your business buys a utility or service for normal operations, the supplier will charge VAT at the standard rate.
Education and training services
Some services are specifically exempt from VAT. Many education and training services fall into this category. For instance, tuition fees for many schools, colleges or vocational courses are exempt from VAT. That means a school or training provider does not charge VAT on qualifying educational fees. (Note that not all training is exempt – always check HMRC’s guidance.) However, as of the 1st January 2025, all private schools are subject to VAT on their fee payments in the UK.
Insurance and financial services
Standard insurance and many financial services are outside the scope of VAT. Businesses do not charge VAT on insurance premiums (auto, property, liability, etc.). Likewise, basic financial transactions like bank interest, loan repayments or simple banking fees are exempt. In these cases, the supplier (insurer or bank) treats the service as VAT-exempt, so no VAT appears on the invoice.
When do freelancers and small businesses have to register for VAT?
A sole trader or freelancer must register for VAT if their taxable turnover (sales of VATable goods/services) exceeds £90,000 in any 12‑month period. The same 12-month rule applies if you expect your next 30 days of turnover to exceed £90,000. Once over the threshold, you must register within 30 days of the month’s end when you passed it. For example, if you hit £100,000 on 15 July, you must register by 30 August and will charge VAT from 1 September. Note that the UK increased the threshold to £90,000 in April 2024, up from £85,000.
Below the threshold, registration is optional. Voluntary registration can be advantageous if you incur VAT on purchases and want to reclaim it. For instance, if a new web designer under £90k of sales needs to buy expensive software with VAT, registering voluntarily lets them reclaim that VAT. But remember, once registered you must charge VAT on your sales and handle VAT returns.
Is there VAT on digital services for freelancers and online sellers?
A freelance teacher selling an online course to UK students would charge 20% VAT on each sale. Selling the same course to a US student incurs no UK VAT (the sale is outside UK scope). If selling to EU consumers, the freelancer would use the EU’s VAT OSS scheme or local EU registration.
Is there VAT on professional services to UK or EU clients?
A UK-based consultant, photographer, designer or developer bills another UK business £1,000 for work. At 20% VAT, the invoice total is £1,200. If the consultant instead invoices a business in Germany, no UK VAT is charged – the German business accounts for VAT by the reverse-charge rule. However, charging a private (non-business) EU consumer for a webinar would still attract UK VAT under place-of-supply rules.
Conclusion
In summary, VAT applies to the vast majority of business sales. Virtually any product you sell or service you provide will include VAT at the appropriate rate, unless it’s in a special exempt category. The main exceptions are essentials like basic food and children’s clothing at 0% and certain services like health, finance and insurance. When in doubt about a particular supply, consult HMRC or a tax advisor. For help spreading the cost of large VAT bills, consider financing options like VAT loans or short-term business loans to cover the payment.
Each business model requires attention to VAT details. Keep records of your sales, whether domestic or international, and track your turnover. When approaching the £90,000 threshold, plan for registration and pricing changes.
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