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VAT (Value Added Tax) is a consumption tax applied to goods and services at each stage of production and distribution. Unlike a simple sales tax that is only collected at the point of final sale, VAT is collected at every step of the supply chain — but businesses can reclaim the VAT they pay on their purchases (input VAT), so the tax burden ultimately falls on the final consumer.
VAT is one of the most widespread taxes in the world: it exists in over 160 countries under various names — IVA in Spain and Italy, TVA in France, MwSt in Germany, GST in Australia and Canada.
The key concept is the VAT chain. Every business in the chain charges VAT on its sales (output VAT) and reclaims VAT on its purchases (input VAT). It only pays the difference to the tax authority. The final consumer, who cannot reclaim VAT, bears the full cost.
Here's a simple example with a wooden chair, at 20% VAT:
| Stage | Sale price (excl. VAT) | VAT charged | VAT reclaimed | VAT paid to HMRC |
|---|---|---|---|---|
| Timber supplier → Manufacturer | £100 | £20 | £0 | £20 |
| Manufacturer → Retailer | £200 | £40 | £20 | £20 |
| Retailer → Consumer | £300 | £60 | £40 | £20 |
| Total VAT collected by HMRC | £60 | |||
The consumer pays £360 total (£300 + £60 VAT), and HMRC collects £60 in total — exactly 20% of the final consumer price. Each business in the chain only forwards the VAT it added.
The UK has three VAT rates:
| Rate | % | Common examples |
|---|---|---|
| Standard | 20% | Most goods and services: electronics, clothing (adult), professional services, alcohol, restaurants |
| Reduced | 5% | Domestic energy (gas, electricity), children's car seats, sanitary products, certain renovations |
| Zero | 0% | Most food, children's clothing and footwear, books and newspapers, most public transport, new housing |
| Country | Standard VAT rate | Reduced rate(s) |
|---|---|---|
| Germany | 19% | 7% |
| France | 20% | 5.5%, 10% |
| Spain | 21% | 4%, 10% |
| Italy | 22% | 4%, 5%, 10% |
| Netherlands | 21% | 9% |
| Belgium | 21% | 6%, 12% |
| Portugal | 23% | 6%, 13% |
| Sweden | 25% | 6%, 12% |
| Denmark | 25% | None (0%) |
| Ireland | 23% | 9%, 13.5% |
| Poland | 23% | 5%, 8% |
| Greece | 24% | 6%, 13% |
You must register for VAT in the UK when your taxable turnover exceeds £90,000 in any rolling 12-month period (threshold as of April 2024). You can also register voluntarily below this threshold, which can be beneficial if your clients are VAT-registered businesses (they can reclaim the VAT, so it costs them nothing), and you incur significant VAT on your own purchases (you can reclaim it).
Each EU country has its own registration threshold. They tend to be much lower than the UK threshold — typically between €10,000 and €85,000. For cross-border digital services and goods sold to EU consumers (B2C), the OSS (One Stop Shop) scheme applies: if your EU cross-border sales exceed €10,000/year, you must register and account for VAT in each buyer's country (or use OSS to file in one place).
Even below the threshold, voluntary registration makes sense if:
Quick mental maths for 20% VAT: divide by 6 to get the VAT amount from a gross price (£120 ÷ 6 = £20 VAT).
VAT-registered businesses must submit VAT returns — typically quarterly — summarising their output VAT (charged on sales) and input VAT (paid on purchases). The net amount is either paid to HMRC or, if you've paid more VAT than you've collected, you receive a refund.
Since April 2022, all VAT-registered businesses in the UK must use MTD-compatible software to keep digital records and submit VAT returns. Paper filing is no longer accepted. MTD-compatible software must generate a digital audit trail linking your transactions to your VAT return.
Factinvo's UK invoice generator includes a MTD VAT Summary that captures the data points required for MTD compliance — making it easy to export your transaction data to your accounting software.
Use our free VAT calculator to add or remove VAT at any rate. No sign-up needed.
Open VAT Calculator →