Check the HMRC’s page providing guidance on the VAT rates on different goods and services: https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
Expenses where you do pay VAT
In running your business, you purchase and pay for a variety of goods and services from your suppliers. For most of these transactions, you pay VAT as part of the overall cost on the supplier’s invoice.
- Standard-rate VAT
The standard rate for most purchases is 20% of the pre-tax price. For example, if you buy a new laptop where the wholesale price is £500, you’ll pay 20% VAT (£100) and a total price of £600.
- Reduced-rate VAT
There are a few products and services that are charged at a reduced VAT rate of 5%, but these are generally more domestic items like children’s car seats or home energy costs.
Expenses where you don’t pay VAT
With some purchases, you won’t pay any VAT, and these transactions need to be coded correctly so that your VAT return has the right information about the costs that you have incurred.
There are three main types of expenses where you don’t pay VAT:
- Zero-rated expenses
This means that the goods are still ‘VAT-able’, but the rate of VAT is 0%. Most items that have no VAT (i.e. where the VAT amount on the bill is £0.00) will be classed as zero-rated expenses. There are exceptions to the rule, though, and some of your expenses may end up being classified as either ‘Exempt expenses’ or ‘No VAT’. Note: Zero-rated expenses are also used where you don’t have a VAT receipt for the transaction – you need a receipt to claim back your VAT.
- Exempt expenses
Exempt expenses are items on which you can’t charge VAT. Because VAT can’t be recovered on these purchases, they should not be included in your VAT records. Expenses that fall into this bracket are things like insurance, interest you pay on loans, and postage stamps.
- No VAT
Some goods and services fall outside the scope of the VAT tax system. If you have transactions that fall outside the scope of VAT, you can’t charge or reclaim VAT on them, so they should not appear on your VAT return. Examples of these ‘No VAT’ items could include goods or services you’ve purchased outside the EU, or voluntary donations you’ve made to charity.