Value Added Tax (VAT) is a consumption tax applied to most goods and services sold in the UK. Whether you are running a business, filing a tax return, or simply trying to understand why prices differ between a receipt and a shelf label, knowing how VAT rates work is essential. This guide breaks down every UK VAT rate for the 2026/27 tax year, explains which items fall into each category, and covers the flat rate scheme for smaller businesses.
The Three VAT Rates
HMRC applies three distinct VAT rates. Each one targets a different category of goods and services, and understanding which rate applies to your transaction can save you money and keep your records accurate.
| Rate | Percentage | Applies To |
|---|---|---|
| Standard | 20% | Most goods and services |
| Reduced | 5% | Domestic energy, children's car seats, sanitary products |
| Zero | 0% | Most food, children's clothing, books, newspapers |
Standard Rate (20%)
The standard rate of 20% has been in place since 4 January 2011. It applies to the vast majority of goods and services sold in the UK, including electronics, clothing for adults, professional services, restaurant meals, alcohol, and most retail goods.
If an item or service does not specifically qualify for the reduced rate, zero rate, or an exemption, the standard rate applies by default. For businesses, this means charging 20% on top of your net price when invoicing VAT-registered customers.
Reduced Rate (5%)
The reduced rate targets a narrow set of goods and services that the government considers essential or socially beneficial but not quite qualifying for zero rate:
- Domestic fuel and power - Gas and electricity for household use
- Children's car seats - Seats designed for children under 12 or below 135cm
- Energy-saving materials - Insulation, solar panels, and heat pumps installed in residential properties
- Smoking cessation products - Nicotine patches, gum, and similar aids
- Mobility aids for the elderly - Stairlifts, adjustable beds, and walk-in baths for qualifying individuals
- Contraceptive products
Since April 2022, the installation of energy-saving materials in residential properties returned to the 5% rate (temporarily zero-rated during the energy crisis period). Always confirm the current status with HMRC guidance, as these items can shift between rates in response to policy changes.
Zero Rate (0%)
Zero-rated goods carry a VAT charge of 0%. The key difference from exempt goods is that businesses selling zero-rated items can still reclaim input VAT on their own purchases. This distinction matters enormously for cash flow and profitability.
Common zero-rated categories include:
- Most food and drink - Raw ingredients, bread, milk, fruit, vegetables, meat, and fish (but not catering, hot takeaway food, confectionery, crisps, or alcoholic drinks)
- Children's clothing and footwear - Garments designed for children under 14
- Books, newspapers, and magazines - Including e-books and e-newspapers since May 2020
- Prescription medicines and medical equipment
- Construction of new residential buildings - The first sale of a newly built home
- Exports - Goods sold to customers outside the UK
- Public transport - Bus and train fares
The Jaffa Cake Problem
One of the most famous VAT disputes involved whether Jaffa Cakes are biscuits (standard-rated) or cakes (zero-rated). McVitie's successfully argued they are cakes because they go hard when stale, while biscuits go soft. The tribunal agreed, and Jaffa Cakes remain zero-rated. This case illustrates just how specific and occasionally absurd the boundary between zero-rated and standard-rated food can be.
VAT Exempt Supplies
Exempt supplies sit outside the VAT system entirely. Unlike zero-rated goods, businesses making only exempt supplies cannot register for VAT or reclaim input tax. Major exempt categories include:
- Insurance
- Finance and credit
- Education (by eligible bodies)
- Health services provided by registered practitioners
- Burial and cremation services
- Subscriptions to trade unions and professional bodies
- Betting, gaming, and lottery
- Some land and property transactions
The VAT Registration Threshold
For the 2026/27 tax year, you must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. You can also register voluntarily below this threshold, which is often worthwhile if most of your customers are VAT-registered businesses, since they can reclaim the VAT you charge and you can reclaim VAT on your own purchases.
The deregistration threshold is £88,000. If your taxable turnover drops below this level, you can apply to cancel your VAT registration.
The Flat Rate Scheme
Small businesses with a taxable turnover of £150,000 or less can join the Flat Rate Scheme. Instead of tracking VAT on every purchase and sale, you pay a fixed percentage of your gross turnover to HMRC and keep the difference. The percentage varies by industry:
| Business Type | Flat Rate % |
|---|---|
| Computer and IT consultancy | 14.5% |
| Management consultancy | 14% |
| Hairdressing | 13% |
| Pubs | 6.5% |
| Retailing food and similar | 4% |
| Labour-only building / construction | 14.5% |
New businesses joining the flat rate scheme receive a 1% discount in their first year. The scheme simplifies bookkeeping but may not always save you money, particularly if you have high input VAT from buying goods. Run the numbers both ways before committing.
VAT on Imports and Exports
Since Brexit, businesses importing goods from the EU pay import VAT at the point of entry (or via postponed VAT accounting on their VAT return). Exports to both EU and non-EU countries remain zero-rated, provided you hold evidence of export. This is one area where the rules have changed significantly, so keeping documentation is critical to support zero-rating on your returns.
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