What are the different types of VAT?

If you’re VAT registered or you’re looking to register for VAT, you might have a few questions you want answers to. If those questions are about the different types of VAT registrations, or what products and services fall under each category or what VAT schemes you might be eligible for, then you’ve come to the right place.

What are the 3 types of VAT?

You’re probably already aware of the standard VAT rate, as that’s added to most goods and services, but what are the three different types of VAT?

Standard rate 20%

Most goods and services fall under the 20% standard VAT rate, e.g. Electronics, Adult clothing, IT services, catering and other hospitality services, domestic and industrial cleaning services and more.

Reduced rate 5%

This reduced rate applies to items and services classed as ‘essential’. So things including children’s car seats, gas and electricity, stop smoking products, welfare and charitable services, and energy-saving materials such as solar panels and insulation (if you’re eligible, some of these products might qualify for 0% VAT).

Zero rate 0%

Some products and services are zero-rated for VAT, including unprocessed food staples like flour and rice, books, children’s clothes, prescription drugs, products sold at charity events, anything donated for charity sales and more.

VAT schemes explained

A VAT scheme is an accounting method to help you manage your value-added tax payments. And which VAT scheme you use depends on what your business sells, its size and sometimes its turnover.

So, if you’re overwhelmed with the complexities of the different types of VAT schemes, here’s a quick-start guide.

Standard VAT accounting scheme

As you’d imagine from its name, this is the most common type of VAT scheme. You calculate VAT based on invoices issued and received. This is regardless of payment timing (accrual accounting).

Your VAT bill is the difference between the VAT you pay on purchases and the VAT you charge customers. Don’t forget, you can reclaim VAT on your purchases, too.

Flat-rate scheme

This scheme is where your VAT bill is a percentage of your company turnover (turnover must be £150,000 or less) — this rate also depends on which sector your company operates in. With this scheme, you can’t reclaim VAT on purchases.

VAT retail scheme

There are three VAT retail schemes to choose from — Point of Sale Scheme (identify and record VAT at time of sale), Apportionment Scheme (if you purchase goods for resale) and Direct Calculation Scheme (for retailers who sell goods at different tax rates). To use these schemes, your retail turnover must not exceed £130 million. Instead of calculating VAT from each sale, you’ll calculate it just once with each VAT return.

VAT annual accounting scheme

If your turnover is £1.35 million or less, you could be eligible for this accounting method. You submit one VAT return a year instead of four quarterly returns, make payments during the year, which can help cash flow, and you can request a refund if you overpay.

VAT cash accounting scheme

With this accounting method, you only pay your VAT bill to HMRC when you receive invoice payments, and you can reclaim VAT after you pay your suppliers, rather than paying based on the invoice date. This is another method that can help you keep a healthy cash flow.

VAT margin scheme

This scheme is where you pay VAT only on the profit you make from selling certain items (antiques, used cards, second-hand furniture, etc.), instead of paying VAT on the full item price. As an example, if you purchase a cabinet for £200, but you sell it for £280, you only pay VAT on that £80 profit. This accounting method means you have a lower tax bil,l but you can’t reclaim VAT on purchases.

What if I can’t pay my VAT bill?

After calculating your VAT bill, you might worry you can’t pay it in one go. Paying it at once or even quarterly can considerably deplete your working capital, particularly if you’re a small business battling with unstable cash flow.

The good news is that you can split your VAT bill into affordable monthly repayments over months or years by applying for a VAT loan. This loan takes the stress and worry about paying your value-added tax bill on time and keeps cash reserves healthy to ensure you keep your business operating as smoothly as possible.

You might qualify for a VAT loan if your business is VAT-registered and has been operating for at least 12 months. Find and compare VAT loan lenders.

VAT Types FAQs

What VAT type should I use for self-employment?

Which VAT type you choose depends on your self-employed turnover and the types of goods or services you provide to customers. For example, if you offer web design services and you’re VAT registered (i.e. your taxable turnover is more than £90,000), you will charge customers 20% on top of your fee.

Which type of VAT registration do I want?

There are two types of VAT registration — compulsory or voluntary. Which you choose depends on a few things, including your taxable turnover. If you earn over £90,000 in taxable turnover, you must register for VAT. But you can still register for VAT if you earn below the threshold. You might voluntarily register for VAT for business reasons i.e. to look more professional or you want to reclaim VAT on purchases.