What is VAT and how it flows through your business
Output VAT, input VAT and the standard rate - explained
This article applies if your business is registered, or required to register, for VAT. If it applies to you, VAT (Value-Added Tax) is collected by your business on behalf of HMRC. You charge it to customers on your sales, reclaim it from HMRC on your purchases, and pay the difference each period.
Output VAT and Input VAT
Output VAT is the VAT you charge on your sales. Input VAT is the VAT you pay on your purchases. Each quarter, input VAT is deducted from output VAT. If output exceeds input, you pay the difference to HMRC. If input exceeds output, HMRC repays you.
The standard rate
Most business services and goods are subject to VAT at 20% (the standard rate). Some supplies are zero-rated (0%) or exempt. When in doubt, 20% is the default for most UK business services.
💡 Good to know: VAT is not your money. The 20% you add to invoices belongs to HMRC and must be set aside. A separate business savings account for VAT can prevent cash flow difficulties at payment time.
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