Read Time:

What are UK VAT codes and why do they matter?

October 26, 2021

Most of these mistakes are ultimately a result of not knowing what exactly these codes mean, an easily avoidable mistake which can determine. In this piece, we explore what exactly tax codes are, what they mean and what they look like on a sales or purchase form.

What are UK VAT codes and why do they matter?

In short, VAT codes indicate exactly how much VAT should be paid on various goods and services bought and sold in the UK. When added to a tax return form, you'll recognise them as a percentage followed by either one or two digits, reflecting the initials of the VAT rate applied.These few digits can make all the difference when it comes to making sure you've submitted your tax returns correctly. Even if everything else on the form is correct, without the right tax code you could find yourself either over- or under-paying tax, potentially risking putting yourself out of pocket.Before delving into the different tax codes and what exactly they mean, it's good to have a solid grasp of why exactly there are different tax codes to choose from in the first place. For this, we'll take a step back and have a look at what VAT is and how it works.Pressed for time? We've summarised everything you need to know about UK VAT codes in the video below.

VAT rates

Some items can be classified as exempt or out of scope, meaning that they aren't subject to tax and can therefore be excluded from tax returns, and if a business sells solely VAT exempt items — such as children's clothing, for example — they can apply for VAT exemption. You can find out more on VAT exemption here.

VAT codes and where to use them

With different VAT codes indicating the different rates of tax needing to be paid on particular items, it's good to familiarise yourself with what the different tax codes look like so you can keep an eye out for them when filing tax returns.We outline below what these tax codes look like and the certain items you'll be able to apply them to.Please note: if your business is on a VAT Flat Rate Scheme, the rules applicable to your are slightly different from those listed below. On this scheme, you'll still be charging the same VAT rates as other VAT registered businesses on the goods and services you provide, but you'll only pay a fixed rate of VAT, keeping the difference between what you charge your customers and pay to HMRC.

Standard rate — 20.0% S

Reduced rate — 5.0% R

A reduced rate of VAT is applied to the following items:

Children's car seats, booster seats and booster cushionsPower (electricity, gas and fuel) and installed energy-saving materials for home energy provisionMaternity productsMobility aids — however, these are only considered reduced rate if they're for people over 60 years old and the appliances are installed directly into their homes

VAT exempt — Exempt

The following goods and services are non-VATable and therefore are not charged VAT:

Insurance, finance and creditEducation and trainingFundraising events by charitiesSubscriptions to membership organisationsSelling, leasing and letting of commercial land and buildings (although this exemption can be waived under certain conditions)Postage stamps or servicesHealth services provided by doctors

Zero-rate — 0.00% Z

Similar to VAT exempt items, zero-rate items are not charged VAT. However, the critical difference between the two lies in what needs to be listed on a tax return form; while VAT exempt items can be left off, zero-rated items still need to be listed.Zero-rated goods include:

Books and newspapersChildren's clothes and shoesMotorcycle helmetsMost goods exported from England, Wales and Scotland to a country outside of the UK

Rates can change and you must apply any changes to the rates from the date they change.

Outside the scope — No VAT

If an item is outside the scope of VAT, it means that the item falls outside of the tax system and therefore when sold, the vendor cannot charge VAT or reclaim it on that item. Items that fall outside the scope include:

Goods and services bought and used outside of the UKStatutory fees, such as the London congestion chargeGoods sold as part of a hobby (e.g. coin collections)Donations to a charity if given without receiving anything in return

To keep things simple, you can find the different VAT rates, their corresponding tax codes and the codes to use on both sales forms and purchase forms in the table below.