VAT (Value Added Tax)
Plain-English definition of VAT (Value Added Tax) — part of our running a business glossary.
Definition
VAT is a consumption tax currently at 20% standard rate in the UK. Businesses with taxable turnover above £90,000 must register and charge VAT on sales. They can reclaim VAT paid on most business expenses.
Worked example
A freelancer turning over £95,000 crosses the £90,000 VAT threshold and must register. On standard-rated services, they must now add 20% VAT to invoices and can reclaim VAT on business purchases. For B2B clients who can reclaim it, this is neutral; for B2C clients it is effectively a 20% price rise or a 16.7% margin hit.
Why it matters
Small-business tax is not optional paperwork — it is the structural choice that determines how much of your gross income you actually keep. The gap between a well-structured limited company and a poorly-run sole trader on the same turnover can easily run to five figures per year.
Common mistake
Treating the business bank balance as personal take-home. Retained profit is not the same as disposable income, and dividend tax plus corporation tax is still owed even if the cash is sitting in the company account.
Calculators that use this concept
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See also
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- SDLT (Stamp Duty Land Tax) — Stamp Duty Land Tax is the UK tax on residential and commercial property purchases in England and Northern Ire…