Definition
VAT, or Value Added Tax, is a consumption tax charged on most goods and services supplied in the United Kingdom and the European Union. It is collected at every stage of the supply chain. A VAT-registered business charges VAT on its sales (output tax) and reclaims VAT on its purchases (input tax). The net difference is paid to or refunded by the tax authority.
What VAT means in practice
VAT is the largest indirect tax in the UK and dominates bookkeeping workload for any client over the registration threshold. The mechanics are straightforward: you charge VAT on your sales at the rate that applies to the goods or service (20%, 5%, or 0%), and you reclaim VAT on your business purchases. The net position is reported quarterly on a VAT return and either paid to HMRC or refunded.
The complications come from edge cases. Exempt supplies (financial services, residential rent, insurance) do not carry VAT and do not allow input VAT recovery on related costs. Outside-the-scope supplies (statutory fees, fines) are not in the VAT system at all. Reverse-charge transactions (most B2B services from overseas, construction industry payments between VAT-registered businesses) shift the VAT accounting from the supplier to the customer. Most quarterly errors come from one of these three buckets, not from the standard-rate calculations.
A practical example: a UK consultancy invoices 10,000 for a project. They add 2,000 of output VAT, so the customer pays 12,000. The same quarter, the consultancy buys 3,000 of software and reclaims 600 of input VAT. The net VAT due on the return is 2,000 minus 600, which is 1,400. That is what gets paid to HMRC by the quarterly deadline.
How VAT works by country
United Kingdom
VAT is the dominant indirect tax. The compulsory registration threshold is 90,000 of taxable turnover in any rolling 12-month period (as of 1 April 2024). The standard rate is 20%, the reduced rate is 5% (mostly domestic energy and a few renovations), and the zero rate applies to most food, children’s clothing, books, and public transport. Exempt supplies (financial services, residential rent, insurance, education, healthcare) do not carry VAT and do not allow recovery on related costs.
Making Tax Digital for VAT is mandatory for every registered business since 1 April 2022, regardless of turnover. That means digital records, MTD-compatible software, and digital links between any systems involved in the return. Copy-paste between spreadsheets does not qualify as a digital link.
Australia
Australia does not have VAT. The Australian indirect tax is GST, a flat 10% rate administered by the ATO and reported on the Business Activity Statement (BAS). The mechanics are similar to VAT (you charge GST on sales and claim back input tax credits on purchases) but the rate structure is much simpler. See the GST entry for the AU rules.
New Zealand
New Zealand also uses GST, at a flat 15% rate (the highest in the OECD for a country with no reduced rate). IRD administers it. Registration is required at NZD 60,000 of taxable supplies in any 12-month period. Tax invoices were renamed “taxable supply information” by the 2023 reforms but the substance is unchanged.
Canada
Canada has GST (5% federal) which combines with provincial sales tax in HST provinces (Ontario, NB, NS, NL, PEI). The combined HST rates range from 13% to 15%. AB, NT, NU, YT have GST only. BC, SK, MB, QC use GST plus a separate PST or QST. See the HST entry for the Canadian-specific rules.
Singapore
Singapore has GST. The rate moved from 7% to 8% in January 2023 and to 9% in January 2024. The registration threshold is SGD 1 million. IRAS administers the regime. GST InvoiceNow (electronic invoicing on the Peppol network) becomes mandatory for newly-registered businesses from November 2025 and for all GST-registered businesses from April 2026.
Related terms
VAT sits inside a cluster of consumption-tax concepts that you will see together on most UK client work:
- GST is the equivalent tax in Australia, New Zealand, and Singapore.
- HST is the harmonised federal-plus-provincial version used in five Canadian provinces.
- Input VAT is the VAT you reclaim on business purchases.
- Output VAT is the VAT you charge on your sales.
- Reverse charge VAT shifts the VAT accounting from supplier to customer for cross-border services and UK construction work.
- MTD (Making Tax Digital) is the HMRC programme that requires digital records and digital filing.
- A tax invoice is the document required to support input VAT recovery.
See also
For the full UK VAT lifecycle (registration, returns, MTD, reverse charge), see the UK VAT and MTD guide. For the equivalent Australian and Canadian regimes, see the AU GST and BAS guide and the CA GST and HST guide.
FAQ
See the answered questions above for the UK registration threshold, the standard rate, and MTD requirements.