When You Can’t Charge VAT (and What To Do If You Did)

Not every sale attracts 20% VAT. Picking the right rate protects your margin and avoids HMRC corrections.

When you issue an invoice as a VAT-registered business, you must apply the correct VAT treatment. While the standard rate (20%) covers most UK supplies, there are other categories you need to know:

The VAT treatments at a glance

• Standard rate (20%) – most goods/services.

• Reduced rate (5%) – e.g., some domestic fuel/power, children’s car seats (check specifics).

• Zero rate (0%) – e.g., most food (not catering), children’s clothing, books/newspapers (incl. most e-publications).

• Exempt (no VAT, no input recovery) – e.g., insurance, postal stamps, certain healthcare by registered professionals, education by eligible bodies.

• Outside the scope – transactions not within UK VAT at all, e.g., statutory fees (like London Congestion Charge), some non-UK supplies used and consumed wholly overseas, hobby sales.

Tip: “Zero-rated” is not the same as “Exempt”.
Zero-rated sales still count as taxable supplies (you can usually reclaim input VAT). Exempt sales do not.

Can I charge VAT on this invoice? A quick checklist

1. What am I supplying? (Goods/service and exact nature)

2. Where is the supply? (Place of supply rules may move it outside UK VAT)

3. Who is the customer? (Consumer vs business; UK vs overseas)

4. Is there a specific relief? (Zero/reduced rate)

5. Could it be exempt or outside the scope?

6. Have I reached/expect to reach the VAT threshold? (Rolling 12 months)

If you charged VAT by mistake

• Over-charged VAT (charged VAT on exempt/zero/outside-scope):

  • Credit note the incorrect VAT and re-issue the invoice with the correct treatment.

  • Adjust your next VAT return accordingly.

• Under-charged VAT (should have charged but didn’t):

  • Raise a VAT-only invoice to the customer (if contract allows), or absorb the VAT (reduces your margin).

  • Correct via your next VAT return (error correction rules may apply depending on size/timing).

Not registered yet? Don’t charge VAT

• Never charge VAT before your effective registration date.

• If you did, you may need to treat the price as VAT-inclusive (remit the VAT to HMRC) and correct customer invoices.

Registration basics

• You must register once your taxable turnover passes the rolling 12-month threshold (and you can register voluntarily below it).

• Voluntary registration can help you reclaim input VAT, but consider your customer base (B2C vs B2B).

Quick FAQs (on-page content)

Q1) What’s the difference between zero-rated and exempt?
A: Zero-rated is taxable at 0% (you normally can reclaim input VAT). Exempt supplies are not taxable and block input VAT recovery linked to them.

Q2) Is the Congestion Charge subject to VAT?
A: No — it’s a statutory fee and generally outside the scope of VAT.

Q3) I charged 20% by mistake on an exempt sale — what now?
A: Issue a credit note for the VAT and re-invoice correctly. Adjust your VAT return to remove the over-declared VAT.

Q4) I’m below the VAT threshold — can I still register?
A: Yes, voluntary registration is allowed and can be beneficial if you have input VAT to reclaim and mostly VAT-registered customers.

Q5) If I supplied services to a non-UK business, do I charge UK VAT?
A: Often no (place-of-supply rules may put it outside UK VAT), but it depends on the service type and customer status — get advice.