The UK has three VAT rates: a standard rate of 20% that applies to most goods and services, a reduced rate of 5% for a narrow group of items including domestic energy, and a zero rate of 0% covering essentials like most food, children’s clothing, and books. A fourth category, exempt supplies, sits outside the VAT system entirely and includes things like insurance, most financial services, and regulated healthcare. HM Revenue and Customs administers the tax, which is collected at each stage of the supply chain so the final consumer effectively bears the cost.
The Standard Rate of 20%
The 20% standard rate applies to any goods or services that don’t qualify for a lower rate or an exemption.1GOV.UK. VAT Rates Phones, televisions, furniture, cleaning products, alcohol, and most of what fills a high street shop sit at this rate. So do professional services like legal advice, accounting, and consultancy.
For a VAT-registered business, 20% is the default. Every sale is standard-rated unless a specific relief applies. Getting the classification right matters both ways: charging 20% on a zero-rated item overcharges the customer, and failing to charge it on a standard-rated item underpays HMRC.
Digital services sold to UK consumers also carry 20%. Software subscriptions, streaming content, and e-books to UK customers are treated the same as any other standard-rated supply.2GOV.UK. VAT Rules for Supplies of Digital Services to Consumers Sales to consumers outside the UK are not subject to UK VAT, though they may be taxable in the customer’s own country.
The Reduced Rate of 5%
A smaller group of goods and services attracts 5% instead of the full 20%. The reduced rate covers items the government treats as socially important but that don’t qualify for full zero-rating.
The biggest category is domestic energy. Gas, electricity, heating oil, and solid fuel for residential use all sit at 5%. Smoking cessation products like nicotine patches and gum qualify, as do children’s car seats and booster seats.3GOV.UK. VAT Rates on Different Goods and Services Mobility aids installed in the homes of people aged 60 or over also fall into this bracket.
The lower rate doesn’t remove any compliance obligations. Businesses selling reduced-rate items still report the transactions to HMRC on their VAT returns; only the amount collected changes. Misclassification between the standard and reduced rates is one of the more common errors HMRC picks up, particularly for businesses selling a mix.
Zero-Rated Goods and Services at 0%
Zero-rated items carry a VAT rate of 0%, so the consumer pays no tax. The important detail is that zero-rated sales are still classified as taxable supplies, which means a business making them can reclaim VAT on related expenses.3GOV.UK. VAT Rates on Different Goods and Services That is the key difference from exempt supplies, which look similar at the till but behave very differently on a VAT return.
The familiar zero-rated categories are:
- Most food and drink, including bread, meat, vegetables, fruit, and tea. Confectionery, crisps, ice cream, alcoholic drinks, soft drinks, hot takeaway food, and catering are all standard-rated at 20%.3GOV.UK. VAT Rates on Different Goods and Services
- Children’s clothing and footwear.3GOV.UK. VAT Rates on Different Goods and Services
- Books and newspapers, in both print and digital formats.3GOV.UK. VAT Rates on Different Goods and Services
Food is where businesses trip up most often. The boundary between zero-rated food and standard-rated confectionery or snack food has generated decades of case law. A plain biscuit is zero-rated; a chocolate-covered biscuit is standard-rated. A cold sandwich from a shop is zero-rated; a hot pasty sold to eat immediately is standard-rated.
Energy-Saving Materials Temporarily at 0%
From 1 May 2023 through 31 March 2027, the installation of energy-saving materials in homes is zero-rated rather than sitting at the usual 5%.4GOV.UK. Energy-Saving Materials and Heating Equipment (VAT Notice 708/6) The relief covers solar panels, heat pumps (ground, air, and water source), insulation, wind turbines, draught stripping, central heating controls, and wood-fuelled boilers. Since February 2024, energy storage batteries, smart diverters, and groundworks for heat pump pipework also qualify.
After 31 March 2027, these installations revert to the 5% reduced rate.4GOV.UK. Energy-Saving Materials and Heating Equipment (VAT Notice 708/6) For anyone weighing a heat pump or solar panel installation, the timing changes the total cost.
VAT-Exempt Supplies
Exempt supplies look like zero-rated goods on the surface because neither involves the consumer paying VAT. The mechanics underneath are different. A business making exempt supplies cannot reclaim the VAT it incurs on related costs, so that irrecoverable VAT becomes a real expense that either gets absorbed or passed on in higher prices.
The main exempt categories are:
- Financial services, including insurance, loans, credit, and most banking transactions.5Legislation.gov.uk. Value Added Tax Act 1994 – Schedule 9
- Health services provided by registered doctors, dentists, and other regulated health professionals.5Legislation.gov.uk. Value Added Tax Act 1994 – Schedule 9
- Education courses provided by eligible bodies, including schools, universities, and certain vocational training providers.5Legislation.gov.uk. Value Added Tax Act 1994 – Schedule 9
- Postal services, where stamps sold at or below face value by a universal service provider are exempt.6GOV.UK. Postage Stamps and Philatelic Supplies (VAT Notice 701/8)
Because exempt sales don’t count as taxable supplies, they also don’t count toward the £90,000 VAT registration threshold. A business dealing exclusively in exempt supplies could have turnover well above £90,000 without triggering mandatory registration.
Partial Exemption for Mixed Supplies
Businesses making both taxable and exempt supplies face a more involved calculation. They can only reclaim VAT on purchases directly linked to their taxable supplies, and VAT on shared overheads has to be split using an approved method.7GOV.UK. Partial Exemption (VAT Notice 706)
There is a practical escape hatch. If total exempt input tax averages no more than £625 per month and is no more than half the total input tax for the period, the business is treated as fully taxable and can reclaim everything.7GOV.UK. Partial Exemption (VAT Notice 706) These “de minimis” limits keep businesses with only a small amount of exempt activity out of the partial exemption calculations altogether.
When These Rates Start Applying to Your Business
The rates only become your problem once you are, or should be, VAT-registered. Registration is mandatory once taxable turnover exceeds £90,000 over any rolling 12-month period.8GOV.UK. How VAT Works – VAT Thresholds It isn’t a calendar-year test; HMRC looks at any consecutive 12 months. There’s also a forward-looking test: if you have reasonable grounds to believe your taxable supplies will exceed the threshold in the next 30 days alone, you must register straight away.9GOV.UK. VATREG18200 – Taxable Supplies: The Forward Look That catches a business that lands a single large contract pushing it over the line.
Below the threshold, businesses can register voluntarily. The main reason to do so is reclaiming VAT on business purchases, and voluntary registration also lets you reclaim VAT going back up to four years on assets still in use at the time of registration. Once registered, though, you charge VAT on your sales at whichever of the three rates applies, and adding 20% to consumer prices without the ability to absorb it can put you at a disadvantage against unregistered rivals.
Turnover below the threshold made up of purely exempt supplies never triggers registration, because exempt sales aren’t taxable supplies. If your income is a mix, only the taxable portion counts toward £90,000.