UK VAT Rates Explained: Complete Guide to 20%, 5% and 0% Rates

Understanding UK VAT rates is essential for business owners, freelancers, and contractors who need to charge the correct amount to customers and complete accurate VAT returns. The UK operates a three-tier VAT system with different rates applying to different goods and services. This guide explains each rate in detail, provides clear examples, and helps you determine which rate applies to your business transactions.

Overview of UK VAT Rates

The UK VAT system includes three rates set by HMRC. Each rate serves a different purpose and applies to specific categories of goods and services. Understanding these distinctions ensures you charge customers correctly and remain compliant with tax regulations.

The three rates are:

• Standard Rate: 20% – the default rate for most goods and services
• Reduced Rate: 5% – applies to specific essential items and services
• Zero Rate: 0% – applies to necessities like food and children’s clothing

Additionally, some goods and services are VAT exempt, meaning no VAT applies at all. The distinction between zero-rated and exempt is important for VAT-registered businesses, as it affects what you can reclaim.

Standard Rate VAT: 20%

The standard rate of 20% is the most common VAT rate in the UK. Unless goods or services specifically qualify for reduced rate, zero rate, or exemption, the standard rate applies by default.

What is Covered by the Standard Rate?

The standard 20% rate applies to the vast majority of business transactions, including:

• Professional services: Accountancy, legal services, consultancy, marketing, and design work
• Adult clothing and footwear: Any clothing or shoes not specifically designed for children
• Electronics: Computers, phones, tablets, televisions, and accessories
• Furniture and home goods: Sofas, beds, kitchenware, and decorative items
• Restaurant and catering: Hot food, alcoholic drinks, and restaurant meals
• Entertainment: Cinema tickets, gym memberships, and leisure activities
• Building and construction: Most building work, extensions, and new builds
• Vehicle sales: Cars, motorcycles, and commercial vehicles
• Digital products: Software, apps, streaming services, e-books, and online courses

Standard Rate Examples

Example 1: A freelance graphic designer invoices £2,000 for a logo design project. The standard rate applies:

• Net amount: £2,000
• VAT at 20%: £400
• Total: £2,400

Example 2: A retailer sells a laptop for £500 (net price). To calculate the total:

• Net price: £500
• VAT at 20%: £100
• Customer pays: £600

For quick calculations, you can use a VAT calculator to ensure accuracy when adding or removing VAT from prices.

Reduced Rate VAT: 5%

The reduced rate of 5% applies to a limited range of goods and services that the government considers essential or worthy of tax relief. This rate helps make certain necessities more affordable while still collecting some tax revenue.

What Qualifies for the Reduced Rate?

The following items and services qualify for the 5% reduced VAT rate:

• Domestic fuel and power: Gas and electricity for residential use (business use is standard rated)
• Energy-saving materials: Solar panels, ground source heat pumps, wind turbines, and insulation
• Mobility aids: Products designed for elderly people, including stairlifts and walk-in baths
• Children’s car seats: Seats and booster seats designed for child safety in vehicles
• Smoking cessation products: Nicotine patches, gum, and other stop-smoking aids
• Contraceptive products: Condoms and other contraceptive items
• Residential conversions: Converting a non-residential building into a home
• Women’s sanitary products: Sanitary towels, tampons, and menstrual cups

Reduced Rate Examples

Example 1: A household receives a quarterly energy bill with a net charge of £400. At the reduced rate:

• Net amount: £400
• VAT at 5%: £20
• Total: £420

Example 2: Installing solar panels on a residential property costs £8,000 (net). The calculation is:

• Installation cost: £8,000
• VAT at 5%: £400
• Total cost: £8,400

When you need to work out VAT on reduced-rate items, the same principles apply as standard rate calculations, but using 1.05 as the multiplier instead of 1.20. Learn more about how to calculate VAT in the UK for different rates.

Zero Rate VAT: 0%

Zero-rated goods and services have a VAT rate of 0%, meaning no VAT is charged to customers. However, these items are still VAT taxable supplies, which is an important distinction for VAT-registered businesses.

Why Zero-Rated Matters for Businesses

If you sell zero-rated goods or services, you still need to account for these sales on your VAT return. The key benefit is that zero-rated sales count towards your taxable turnover for VAT registration purposes, and you can still reclaim VAT on business expenses related to zero-rated sales.

What is Zero-Rated?

The following goods and services qualify for the zero rate:

• Food and drink: Most food sold in shops, including fresh produce, meat, dairy, and packaged foods (but not hot takeaway food, restaurant meals, alcoholic drinks, or confectionery)
• Children’s clothing and footwear: Items designed for children under 14 years old
• Books and newspapers: Printed books, newspapers, magazines, and journals (but not digital versions)
• Prescription medicines: Medicines supplied on prescription or by registered pharmacists
• Medical equipment: Items designed for disabled people, such as wheelchairs
• Public transport: Passenger transport within the UK
• Charity advertising: Advertising services provided to charities
• Water: Water supplied for domestic use
• Exports: Goods exported outside the UK

Zero Rate Examples

Example 1: A supermarket sells groceries worth £150. As most food is zero-rated:

• Net amount: £150
• VAT at 0%: £0
• Customer pays: £150

Example 2: A bookshop sells children’s books for £45:

• Net price: £45
• VAT at 0%: £0
• Total: £45

Even though no VAT is charged, the bookshop reports this £45 on their VAT return and can reclaim VAT on business costs.

VAT Exempt Supplies

Exempt supplies differ from zero-rated supplies in significant ways. When you provide exempt goods or services, you cannot charge VAT, and crucially, you cannot reclaim VAT on related costs. Exempt supplies also do not count towards your VAT taxable turnover.

Common Exempt Categories

• Insurance: All types of insurance products
• Finance: Loans, credit, and certain financial transactions
• Education: Education provided by eligible bodies
• Health: Medical and dental services provided by qualified professionals
• Postal services: Services provided by Royal Mail under universal service obligation
• Burial and cremation: Funeral services
• Property transactions: Selling or leasing certain types of property
• Fundraising events: Events run by charities under certain conditions

The Importance of Understanding Exemption

If your business only provides exempt supplies, you cannot register for VAT. If you provide a mixture of exempt and taxable supplies, you may need to account for this using partial exemption rules, which determine how much VAT you can reclaim on overheads.

Mixed Supplies and Multiple Rates

Many businesses sell goods or services at different VAT rates. Understanding how to handle mixed supplies ensures accurate invoicing and VAT returns.

Calculating Multi-Rate Invoices

Example: A retailer sells the following items on one receipt:

• Adult jeans (standard rated): £40 net, £8 VAT = £48 total
• Children’s shoes (zero rated): £25 net, £0 VAT = £25 total
• Children’s car seat (reduced rated): £100 net, £5 VAT = £105 total

The total receipt shows:

• Standard rated: £40 net + £8 VAT
• Zero rated: £25 net + £0 VAT
• Reduced rated: £100 net + £5 VAT
• Total: £165 net + £13 VAT = £178

A VAT calculator can help when processing multiple items at different rates, ensuring each calculation is accurate before totalling the invoice.

Special Cases and Recent Changes

Digital Services

Digital products and services are standard rated at 20%. This includes downloadable software, apps, e-books, online training courses, streaming subscriptions, and website hosting. Despite physical books being zero-rated, their digital equivalents carry the standard rate.

Hospitality and Tourism

The hospitality sector experienced temporary reduced rates during recent years, but as of 2026, standard rules apply. Hot food and restaurant meals are standard rated at 20%, while most basic groceries remain zero-rated.

Construction Services

Construction has complex VAT rules. New residential builds can be zero-rated, residential conversions qualify for 5%, while repairs and maintenance to existing properties are standard rated at 20%. The specific circumstances determine which rate applies.

How to Determine Which Rate Applies

Follow these steps when determining the correct VAT rate for your products or services:

1. Check HMRC guidance: HMRC publishes detailed notices explaining what falls under each rate. VAT Notice 701/1 covers general principles.
2. Review product categories: Identify whether your goods or services appear in HMRC’s lists for reduced or zero rates.
3. Consider the supply context: The same item might have different rates depending on how it’s supplied. For example, cold takeaway food is often zero-rated, while hot takeaway food is standard rated.
4. Seek professional advice: For unusual or borderline cases, consult an accountant or contact HMRC directly.
5. Document your reasoning: Keep notes on why you’ve applied a particular rate, especially for non-standard items.

VAT Rate Changes and Historical Context

VAT rates are not fixed permanently. The standard rate has changed several times since VAT was introduced in 1973. It started at 10%, increased to 15% in 1979, rose to 17.5% in 1991, temporarily reduced to 15% in 2008-2009, and increased to 20% in January 2011, where it remains today.

Reduced and zero rates have also evolved. Some items have moved between categories based on government policy decisions. For instance, women’s sanitary products were standard rated for many years before moving to 5% in 2001 and finally to 0% in 2021.

Always verify current rates with HMRC, as changes can occur through budget announcements or legislative updates.

Practical Tips for Businesses

Invoice Clarity

When creating invoices with multiple VAT rates, clearly show the breakdown. List items by rate category and show subtotals for each rate before the final total. This transparency helps customers understand charges and simplifies your accounting.

Point of Sale Systems

Configure your till or invoicing software with correct VAT rates for each product. Regular audits ensure products remain correctly categorised, especially when adding new inventory or services.

Record Keeping

Maintain clear records showing which VAT rate applies to each sale. HMRC can query your VAT returns, and you need evidence supporting the rates you’ve charged. Keep product descriptions, HMRC guidance references, and any professional advice received.

Regular Reviews

Review your products and services periodically. Changes in how you supply items might affect the VAT treatment. For example, if you start heating food that was previously sold cold, the VAT rate changes from zero to standard.

Common Mistakes to Avoid

• Assuming all food is zero-rated: Hot food, confectionery, alcoholic drinks, and most beverages are standard rated.
• Confusing zero-rated with exempt: Zero-rated allows VAT reclaims; exempt does not.
• Applying business rates to domestic supplies: Domestic fuel is 5%, but fuel for business premises is 20%.
• Overlooking digital product rules: Digital versions of zero-rated physical goods (like e-books) are standard rated.
• Not updating rates promptly: When rates change, update your systems immediately to avoid compliance issues.

Frequently Asked Questions

What are the three UK VAT rates?

The UK has three VAT rates: standard rate at 20% (most goods and services), reduced rate at 5% (domestic fuel, energy-saving materials, children’s car seats), and zero rate at 0% (most food, children’s clothing, books, newspapers, prescription medicines).

What is the difference between zero-rated and exempt VAT?

Zero-rated supplies have a 0% VAT rate, meaning no VAT is charged but they count towards your taxable turnover and you can reclaim VAT on related costs. Exempt supplies have no VAT, don’t count towards taxable turnover, and you cannot reclaim VAT on related expenses. This distinction significantly affects VAT-registered businesses.

Which products qualify for the 5% reduced VAT rate?

Products qualifying for 5% VAT include domestic fuel and power for residential use, children’s car seats, mobility aids for elderly people, energy-saving materials like solar panels and insulation, smoking cessation products, women’s sanitary products, and certain residential property conversions.

Do digital products have VAT in the UK?

Yes, digital products and services such as e-books, software, apps, streaming services, online courses, and downloadable content are subject to the standard 20% VAT rate in the UK. This applies even when physical equivalents might be zero-rated, such as printed books versus e-books.

Can VAT rates change in the UK?

Yes, VAT rates can change through government legislation and budget announcements. The standard rate has changed multiple times since 1973, and items have moved between rate categories. Temporary rate reductions have been introduced during specific periods, such as the hospitality sector measures. Always check current HMRC guidance for the most up-to-date rates applicable to your business.

Summary

Understanding UK VAT rates is fundamental to running a compliant business. The three-tier system of standard (20%), reduced (5%), and zero (0%) rates, alongside VAT exemptions, covers the full range of goods and services. Knowing which rate applies to your business activities ensures you charge customers correctly, complete accurate VAT returns, and maximise legitimate VAT reclaims.

When in doubt about which rate applies, consult HMRC guidance, seek professional advice, or use reliable tools to calculate VAT accurately. Regular reviews of your product and service classifications help maintain compliance as your business evolves or rates change.