How to calculate VAT: A complete guide

If you’re wondering how to calculate VAT in the UK, you’re unlikely to find a straightforward answer. VAT is one of the more complex taxes, and its calculation depends on the goods or services you sell and buy, as well as other factors, such as if you import goods or have any bad debts that need to be settled.

So although there’s a fixed process, the steps and calculations involved can vary. We’ve put this guide together to help you figure out how to calculate VAT for your business specifically.

How much is VAT in the UK?

There are three VAT rates in the UK, which apply to different categories of products and services.
If your business’s turnover exceeds the VAT threshold (currently £90k over 12 months in the UK), you’re required to collect VAT from customers on the sale of any products or services. You can also choose to register for VAT if your business falls below the threshold.
If your business is VAT registered, you’ll need to include the correct VAT in the prices you set. The VAT rates in the UK in 2024 are:

• Standard rate (currently 20%): The standard rate applies to products and services that aren’t subject to the reduced rate, zero rate, or exempted from VAT (such as postage stamps). So in practice, it’s the rate that usually applies.
  
• Reduced rate (currently 5%): Some goods and services fall under the reduced rate, such as sanitary and some health products, home energy, and children’s car seats. The reduced rate makes these goods more accessible to UK consumers.
  
• Zero rate (0%): Most types of food, books, and children’s clothes fall under the zero rate. Unlike goods that are exempted from VAT, businesses are still required to report the sale of items that fall under the zero rate category in their VAT tax return. You’ll also need to include it on all your business’s invoices and receipts.

Here’s a detailed list of the VAT rates for different goods and services.

How is VAT charged?

Businesses are required to pay VAT on both:

• The products and services that it buys: Fortunately, you can reclaim the VAT that your business pays on your VAT returns.
  
• The products and services it sells: If your business has a taxable turnover over the VAT threshold, you’re required to register it with HMRC as a VAT business and collect VAT.
  Failing to inform HMRC at the time you were required to register as a VAT business can result in a penalty.
  Businesses aren’t only required to charge VAT on the sale of goods and services to customers. You also need to charge it on goods sold to your employees (like discounted meals at food chains), and any equipment or venues you hire out to other parties.

Businesses need to collect the VAT charged on their products or services and pay it to HMRC, usually when they file a VAT return every three months. Depending on the VAT accounting scheme you choose, there might be some exceptions to when you pay this tax to HMRC.

How to calculate VAT (with examples)

You need to calculate how much VAT to add to your prices, and the amount you owe HMRC or how much they may owe you. Here’s what you need to know.

1. Calculating the amount of VAT to charge

To calculate how much VAT to charge, you need to first confirm the VAT rate that applies to your products or services.

For example, if it’s the:

1. Standard rate: You need to add 20% to the product or service’s price by multiplying the price you charge by 1.2. For example, if your business sells furniture for around £200, you need to multiply £200 by 1.2, making the VAT-inclusive price £240.
2. Reduced rate: Let’s say your business sells children’s car seats. Since they’re subject to the reduced rate of 5%, you need to multiply the price you charge by 1.05. For example, if the seats are priced at £50, this means the VAT-inclusive price is £50 x 1.05 = £52.50.
3. Zero rate: For products or services subject to the zero rate of VAT, the VAT-inclusive price is the same as the price you set.

On the receipt or invoice you issue, the item’s price and VAT are listed separately, and then the VAT-inclusive price is listed after.

2. How to calculate the VAT you owe HMRC (or vice versa)

So long as your business has good accounting practices, calculating the VAT you need to pay HMRC (or how much they owe you) is usually straightforward. Here’s a quick overview of how it works:

• You need all the sales invoices, both for products and services you’ve sold and ones you’ve bought. This is where good accounting is important. The VAT you collect on what you sell is known as output VAT, and the amount you pay for products or services you purchase is input VAT.
• You use these invoices to work out the difference between your input and output VAT. Businesses can usually claim back the full VAT amount they’ve paid on the products and services they’ve bought. So this difference determines how much you might get in your VAT return.
  
• You need to account for any VAT exceptions. VAT exceptions specify what you can and can’t claim VAT back on. You need to be familiar with these exceptions to exclude them from the calculation.
  
• Accounting period. You’re required to pay VAT to HMRC for the accounting period in which the item was sold, or the service was delivered; not when the invoice or receipt was issued. There are some exceptions to this, though, such as if you’re signed up for a scheme like the Cash Accounting Vat Scheme.

Now, to calculate your VAT return, you’ll need to consider your business’s input VAT and output VAT and subtract the smaller number from the larger one. Let’s consider two scenarios:

1. Output VAT is greater than input VAT, i.e., your business collected more VAT than it paid. In this case, your business owes HMRC money.
   For example, if your business charged a total of £10,000 of VAT on the goods and services it sold, and it paid £5,000 in VAT on products and services it bought, the VAT calculation formula is:
   £10,000 (output VAT) – £5,000 (input VAT) = £5,000 in VAT. This means you’ll need to pay HMRC £5,000.
   
2. Input VAT is greater than output VAT, i.e., your business paid more VAT than it collected. In this case, you’ll usually be able to claim the excess back from HMRC.
   For example, if your business charged a total of £10,000 and paid £15,000, the VAT calculation formula is:

£15,000 – £10,000 = £5,000 in VAT that your business can claim back from HMRC.

In the section below, we explain how to submit your VAT return using the online form, which does most of the calculations for you.

How to file your VAT return

Other than a few exceptions, almost all VAT-eligible businesses in the UK are required to submit their VAT return online using “functional compatible software” and make any required payments electronically.

The online form also performs most of the calculations for you automatically, simplifying the process. There are nine boxes that you’ll need to enter the correct calculations into, which include:

• Box 1: Here, enter your business’s output VAT for the period covered by the return. Also, you’ll need to deduct any VAT on credit notes issued by you and any VAT on refunds described in the Retail Export Scheme (Northern Ireland).
• Box 2: This box only needs to be completed if you acquired goods in Northern Ireland from EU member states. If this applies to you, it’s important to include any VAT due on these acquisitions. You’ll also need to include VAT due on related costs (such as packing or insurance) from VAT-registered suppliers in EU member states.
• Box 3: This box is for the total output VAT, which you calculate by adding the amounts in boxes 1 and 2.
• Box 4: Here, enter your business’s input VAT. Be sure to deduct VAT on any credit notes issued to you. Don’t include any VAT paid on business entertainment expenses, goods bought wholly for your personal use, or second-hand goods you’ve bought under any of the VAT second-hand schemes.
• Box 5: The amount you owe HMRC, or vice versa, goes here. You can determine this by taking the figures in boxes 3 and 4 and deducting the smaller one from the larger one.
  If the output VAT (box 3) is greater than the input one (box 4), then you owe HMRC the amount left after deducting the two. Otherwise, if the input VAT is greater than the output, the remainder is how much you can reclaim from HMRC.

If the figure in box 3 is more than the figure in box 4, the difference is the amount you must pay. If HMRC needs to make any enquiries, they’ll do so. Otherwise, or when they’re done with the enquiry, they’ll credit your account and repay the balance.

• Boxes 6 to 9: In these boxes, you’re required to input the values of sales, purchases, expenses, etc., without the VAT.

Here are some specific considerations that might apply to your VAT return:

• Accounting for import VAT: The Postponed VAT Accounting (PIVA) system for imported goods lets VAT-registered businesses reclaim import VAT on their usual VAT return, subject to normal rules.
  Under PIVA, there should be three entries on your VAT return for import VAT:
  
  • The import VAT using PIVA
  • The import VAT reclaimed using PIVA
  • The total value of the imports of goods, excluding VAT

These values can be obtained from your online monthly statement, which you can download using the Government Gateway portal.

If you aren’t using PIVA, your business can recover import VAT under Box 4 of the return form. However, you’ll need to have a C79 import VAT certificate.

• Accounting for reverse charge: The reverse charge applies to the VAT that you would have paid on a service in the UK, but instead bought it abroad. In practice, you don’t pay anything extra, because you’re required to add that amount to the total of both what you pay HMRC and what you reclaim from it.
• Claiming relief for bad debt: If you’re a supplier whose customer didn’t pay for goods or services, you may be able to claim VAT relief and write off the invoice as a bad debt. Learn more about the conditions to qualify for this VAT relief.

For more information, you can refer to the UK government’s guide for filling in and submitting VAT returns.

The VAT Flat Rate Scheme for small businesses

If your business has a VAT turnover of £150,000 or less (excluding VAT), you might be eligible to sign up for the Flat Rate Scheme, which can simplify your accounting process for VAT returns.

The scheme doesn’t require you to take the difference between your input and output VATs. Instead, you add up all your sales — including any VAT charged to your customers — and pay HMRC a percentage of those sales. The percentage depends on the types of goods or services you offer.

In practice, this means that, per the Flat Rate Scheme, you can keep the difference between what you charge customers and the amount you pay to HMRC. For example, if you provide agricultural services, you collect 20% VAT from customers at the standard rate. However, you only need to pay HMRC 11% of the sale, meaning you pocket the difference.

If it’s your first year as a VAT-registered business, you’ll also get a 1% discount under the scheme. The drawback of the scheme is that you can’t reclaim VAT on your purchases, except for specific capital assets over £2,000.

Summary: How to calculate VAT

Although the specifics of calculating VAT can vary from business to business, the general method is the same: you work out how much VAT you’ve collected and paid, any exceptions and write-offs, and account for other considerations such as import VAT and reverse charges.

Additionally, the VAT rate varies depending on the type of goods and services you buy or sell. The three rates are the standard rate (currently 20%), reduced rate (currently 5%), and zero rate (0%).

The VAT you collect is known as output VAT, while the amount you pay is known as input VAT. If your output VAT is greater (i.e., you’ve collected more than you paid), you’ll usually owe HMRC the difference. Conversely, if you’ve paid more than you collected (i.e., input VAT is greater than output), you’ll usually be able to reclaim the difference in full in your VAT return.

Want to learn more about businesses and the insurance policies which cover them? You can read:

• SMEs under Labour: boom or bust?
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• READ MORE BUSINESS INSURANCE GUIDES

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