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What are UK VAT codes and why do they matter?

October 26, 2021
This article was updated 2nd March 2023.

Being undeniably one of the more confusing aspects of accounting, the many layers of VAT are enough to keep business owners second-guessing whether or not they've submitted everything to HMRC correctly. One notoriously tricky subject that continues to trip business owners up is VAT codes.

Taking a step back, VAT in itself isn't a particularly easy sector to understand. Otherwise known as Value Added Tax, VAT is a tax on consumption that is added to goods and services across the UK, with myriad rules and regulations that business owners need to follow to keep the taxman at bay.

VAT codes are an important part of submitting tax returns, as these few digits on a tax return form determine the amount of tax you pay to HMRC. Tide’s Caroline Wire warns small business owners that “if you don’t have a clear idea of how VAT codes work, then it could become more difficult to charge and pay the correct amount of VAT. This could leave your business liable to penalties and disrupt your cash flow.”

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?

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

As mentioned above, VAT is a tax on consumer goods and services and is typically separated into three distinct categories: standard, reduced and zero-rate. These tax rates determine the amount of VAT due on the sale of goods and services, with some items being charged a lower rate of tax under specific circumstances outlined by the government.

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

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.
However, you cannot reclaim VAT on your business expenses, except for certain capital assets over £2000. You can find out more about the Flat Rate Scheme on the government website.

Standard rate — 20.0% S

Standard rates for VAT are applicable to the majority of goods and services, and if your business is VAT registered, it's highly likely that you'll be charging standard rate on the items you sell, unless otherwise specified by the HMRC website.

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.
VAT CodeVAT RateCode used on sales formCode used on purchase form
20.0% SStandard rateVAT at 20% to Box 1

Net Sale to Box 6

VAT at 20% to Box 4

Net Purchase to Box 7

ExemptExempt VAT rateNo VAT

Net Sale to Box 6


Net Purchase to Box 7

5.0% RReduced rate VATVAT at 5% to Box 1

VAT at 5% to Box 4

Net Purchase to Box 7

0.00% ZZero-rate VATVAT at 0% to Box 1

Net Sale to Box 6

VAT at 0% to Box 4

Net Purchase to Box 7

No VATOutside the scope of VATN/AN/A
For more on the VAT rates your business may be liable to pay, you can find the full list of VAT rates on the HMRC website.

While VAT isn't the easiest thing to figure out, having at least a basic understanding of the different tax codes can keep you out of trouble with the taxman. If, however, you're still struggling to make sense of your VAT returns, at Ember we can take the tax burden off your shoulders by effortlessly generating, reviewing and submitting your VAT returns directly to HMRC for you.