Running a business? Here’s what you need to know about VAT

4th February 2026

Understanding VAT

For many UK businesses, VAT plays a significant role in day-to-day finances. It influences how you price your products and services, what you can claim back on your own purchases, and the overall cash flow from month to month. Here, we briefly outline some key things you need to know about VAT.

What is VAT?

Value Added Tax (VAT) is added to the price of most goods and services that are sold in the UK. Unlike Corporation Tax or Income Tax, it doesn’t apply to profits; it’s a consumption tax which is ultimately paid by the end customer.

When VAT is added to the sale price of a product or service, the customer pays this. Your business then pays it to HMRC. Similarly, if your business is buying a VAT-able product or service, it pays VAT to the supplier, who then pays it to HMRC. The VAT that you’ve paid can then be offset against any VAT you have collected, with only the difference being paid to HMRC.

For example, Business A has collected £2,000 in VAT this quarter. But it has paid VAT of £1,000 across purchases from other VAT-registered businesses. Business A therefore only needs to pay a VAT bill of £1,000.

If, however, Business A has collected £1,000 of VAT in the quarter and paid £2,000 to suppliers, it can claim a VAT refund.

How does VAT work for a business?

VAT is calculated based on a company’s turnover, not its profit. For the 2026/27 tax year, businesses with a turnover of £90,000 or more in a 12-month period are required to be VAT-registered. Those with a turnover beneath this threshold can register voluntarily. This means that even if an organisation is not making a big margin, it could still be required to pay VAT based on its overall turnover.

Registered businesses are required to submit a VAT return every quarter. This is a report of how much VAT you have collected and how much you have paid to suppliers. Both the VAT return and payment are due one calendar month and seven days after the end of each quarter. If your quarter ends on 31 March, for example, your return and payment would be due on 7 May. VAT bills can be paid by direct debit, bank transfer, or using HMRC’s online payment system.

VAT charges

VAT-registered businesses must charge VAT on all taxable sales, ensuring their invoices reflect this. The three main VAT rates are:

20% standard rate – most goods and services
5% reduced rate – some energy-saving products, children’s car seats, and certain renovations
0% rate – books, children’s clothes, and most food (not including hot or restaurant meals)

Items that are zero-rated must still be included on VAT returns. For clarity and compliance, all invoices must include your VAT number and the rate charged.

VAT on business expenses

Most VAT-registered businesses can reclaim VAT on items purchased for business use, including tools, equipment, stock and software subscriptions. Exemptions include client entertainment, anything purchased for personal use, and purchases without a valid VAT invoice.