How UK VAT works in practice
VAT is a consumption tax charged on most goods and services sold in the UK. Businesses collect VAT from their customers, pay VAT on their own purchases, and remit the net amount to HMRC each return period. The arithmetic is the same in every direction; the work is in picking the right rate.
Standard rate (20%)
Most goods and services. Office supplies, professional services, software, restaurant meals, retail goods, and commercial rent all fall here.
Reduced rate (5%)
A narrow list: children's car seats, home energy, mobility aids, and energy-saving materials installed in residential property.
Zero rate (0%)
Taxable at 0%, but the supplier can still recover input VAT. Most food, children's clothes, books and newspapers, public transport, and prescription medicines.
Exempt
No VAT charged and no input-VAT recovery. Insurance, finance, postage stamps, and most property transactions.
Common scenarios
Adding VAT to your own invoice. If you sell at £200 net and the supply is standard-rated, the gross your customer pays is £240, of which £40 is the VAT you remit to HMRC. Pick Add VAT, type 200, choose standard 20%.
Extracting VAT from a supplier receipt. If a receipt shows £150 inclusive at the standard rate, the VAT component is £25 and the net (the amount that hits your expense account) is £125. Pick Extract VAT, type 150, choose standard 20%.
Reduced-rate supplies. Home-energy invoices and certain installer work fall at 5%. The same add or extract logic applies with the reduced rate selected.
Zero-rated supplies. Calculations all return zero VAT but the supplier still records the sale and can recover input VAT on related costs. Use the zero-rated option to confirm the numbers line up.