VAT Rates in the UK Explained: Standard, Reduced and Zero Rates Made Simple

How VAT Rates Work

VAT can feel like one of the trickiest parts of running a business in the UK. Many owners know they must charge VAT, but far fewer understand which rate applies to which goods or services. Get it wrong, and you risk undercharging (and footing the bill yourself) or overcharging (which damages customer trust and compliance).

In this guide, we break down the three main VAT rates in plain English — standard, reduced, and zero — and explain why knowing the difference is critical for every business.

Understanding VAT Rates in the UK

The Standard VAT Rate (20%)

• This is the rate most businesses know.

• It applies to the majority of goods and services, from retail sales to professional services.

• If you’re unsure which rate applies, standard rate is usually the default unless HMRC guidance specifically says otherwise.

👉 Example: A consultancy invoice of £1,000 will usually attract £200 VAT, meaning the customer pays £1,200.

The Reduced VAT Rate (5%)

• Certain goods and services are charged at 5%.

• Common examples include:
  
  

  • Home energy (gas, electricity, heating oil).

  • Children’s car seats.

  • Some residential conversions and renovations.

👉 Example: A £2,000 heating installation for a home may only carry £100 VAT at the reduced rate.

Zero-Rated Goods and Services (0%)

These are still VAT-taxable supplies, but the rate is 0%.

• This means you don’t add VAT to your invoices, but you can still reclaim VAT on your expenses.

• Common zero-rated items include:
  
  

  • Most food and drink (excluding alcohol, confectionery, and restaurant meals).

  • Children’s clothes and footwear.

  • Books and newspapers.

👉 Example: A shop selling £500 of children’s shoes will not add VAT, but can reclaim VAT paid on stock purchases.

Exempt vs Zero-Rated — Key Difference

Many confuse zero-rated with exempt.

• Zero-rated: No VAT charged, but input VAT can be reclaimed.

• Exempt: No VAT charged and you cannot reclaim VAT on related purchases.

👉 Example: Health services provided by doctors are VAT-exempt, not zero-rated.

Why VAT Rates Matter

Getting It Wrong Costs Money

If you apply the wrong VAT rate, HMRC can demand backdated payments, plus interest and penalties.

Industry-Specific Rules

Sectors like construction, finance, and charities have complex rules — what looks “standard” may actually fall into a reduced or zero category.

Cashflow Implications

Charging the correct VAT ensures you’re not out of pocket when HMRC reviews your returns.

How Wexley & Associates Helps

At Wexley & Associates, we:

• Review your products and services to ensure VAT is applied correctly.

• Monitor industry-specific VAT rules so you don’t have to.

• Protect you from HMRC errors, penalties, and unnecessary liabilities.

👉 Prevention is always cheaper than cure — and when it comes to VAT, mistakes quickly add up.

Your Next Move, Made Simple

VAT doesn’t need to be confusing. The right advice ensures you stay compliant, protect your profits, and avoid HMRC penalties.

Contact Wexley & Associates today for expert VAT guidance tailored to your business.

References

• HMRC: VAT Rates

• Related: Case Study – How Missed VAT Registration Cost a Business £150,000