How VAT works: a beginner’s explanation

The basic idea

VAT-registered businesses may charge VAT on taxable sales and may be able to reclaim VAT on eligible business purchases, subject to the rules.

The return is a summary

A VAT return brings together sales VAT, purchase VAT and other required figures for the period. The result helps determine what is payable to or recoverable from HMRC.

Rate is not the only question

Before calculating VAT, you need to know whether the transaction is within VAT, which treatment applies and whether you have the evidence needed to reclaim VAT.