Any business in the UK offering services for business purposes must be aware of its VAT obligations and whether it must account for VAT on these supplies (this is known as a business’s output VAT). If you are a business owner, failing to meet your VAT obligations may result in financial penalties, so it is necessary to understand what is required of your business.

Below, the experts at The VAT People will explore when a business should charge VAT on services, the benefits of VAT registration for your business's services and how UK VAT consultancy services could help your business implement proper VAT compliance and efficient money-saving practices.

Do I have to charge VAT on services?

As a rule, value-added tax is generally due on almost any service provided by a business in the UK, unless specifically exempted or relating to non-business activities. VAT is chargeable if the business is registered for VAT and if the supply is subject to a positive rate of VAT, meaning that it is not exempt from VAT or zero-rated, although zero-rated supplies are still taxable supplies for VAT purposes. As a result, it is important to seek official guidance on the VAT liability of services you provide to ensure VAT is accounted for correctly.VAT is due on taxable sales at three potential rates:

• Zero rate (0%)
• Reduced rate (5%)
• Standard rate (20%) – the standard rate is generally applied by exception, therefore if a supply is not specifically zero-rated, reduced-rated or exempt, it will be standard-rated by default.

As stated above, some services are exempt from VAT and are consequently not defined as taxable supplies. Confirming the appropriate VAT treatment of specific services your business provides will help you understand when you must apply VAT on supplies made. A further key consideration in relation to exempt supplies is that input VAT incurred in the course of making these supplies cannot be recovered as input tax, even where the business is VAT registered.

Place of supply of services

Where a business provides services to individuals or businesses located around the world, to determine the VAT treatment of a particular supply, it is first necessary to determine the “place of supply” for VAT purposes.  The “place of supply” determines the country in which VAT is payable.

In this regard, from a UK perspective, the following general place of supply rules are set out in VAT legislation:

• Business-to-business (B2B) transactions - The general rule is that the supply is made in the country where the customer belongs.
• Business-to-consumer (B2C) transactions - The general rule is that the supply is made in the country where the supplier belongs.

If a supplier of a service is not registered for VAT in the country where a business customer is established, the responsibility for declaring the VAT usually passes to the business customer (if indeed VAT is due).  This is known as the ‘reverse charge’ principle.

As per VAT notice 741a, section 2.4;

B2C supplies means supplies to a:

• private individual
• charity, government department or other body which has no business activities
• ‘person’ (natural or legal) who receives a supply of services wholly for a private purpose

While the general place of supply rules apply to many services provided, there are specific services that are taxable where performed, or in accordance with other factors. For example, certain land-related services are taxable in accordance with where the land is located, regardless of the location of the supplier and customer.

In the case of the international supply of services, determine the place of supply from the outset to clarify where VAT is due.

What services are exempt from VAT?

Some services are exempt from VAT under UK tax law. This means VAT is not charged on the supply of these services, and the supplier cannot reclaim VAT on related costs either. Exempt services should not be included when calculating whether a business has exceeded the VAT registration threshold. Exemptions apply only in specific circumstances, and eligibility often depends on who provides the service and to whom.

The following services are exempt from VAT:

• Sports and physical education: when provided by an organisation to individuals, such as fitness sessions or club sport activities. However, sports coaching is not exempt unless it is provided by an eligible body for education purposes and falls within recognised education provision.
• Admission to cultural events: this includes access to museums, art exhibitions, theatrical performances, and similar events that promote culture. As with several other exemptions, the treatment of such services as exempt from VAT is restricted to instances where they are provided by an eligible body.
• Charitable fundraising events: if organised by charities and meeting HMRC’s conditions, income received from these events are exempt.
• Health services: these must be carried out by registered health professionals such as doctors, dentists, opticians, pharmacists, and other regulated practitioners and must meet HMRC’s definition of healthcare.
• Education and training: educational or vocational training provided by eligible bodies is exempt. This usually applies to schools, universities, certain non-profit making organisations and government-accredited training providers, not private schools or training delivered on a commercial basis.
• Welfare services: A specific exemption exists for qualifying welfare services whereby they can be treated as exempt from VAT when provided by a qualifying body, such as those with charitable status.

If you're unsure whether your services qualify for exemption or reduced VAT rates, get in touch with our team. We’ll help you calculate the VAT that your services should include and identify the correct VAT treatment for your business.

Do small businesses need to charge VAT?

That depends on how much your UK company is earning. If your taxable turnover exceeds the VAT registration threshold - currently set at £90,000 in a rolling 12-month period - then yes, you are required to register for VAT. Once registered, you must charge VAT on your taxable supplies (also known as output VAT) and submit VAT returns to HMRC, usually every quarter.

It’s important to note that the threshold is calculated on a rolling basis, not by calendar or tax year. This means you need to monitor your turnover continuously. For example, if your turnover from July 2024 to June 2025 exceeds the threshold, even if it didn’t in the previous April to March period, you’ll still need to register.

Once registered, you’ll need to:

• Charge output tax on your taxable sales at the appropriate rate.
• Submit VAT returns to HMRC.
• Pay any VAT you owe, as calculated through the submission of VAT returns.
• Keep proper VAT records and invoices.

Some small businesses choose to register voluntarily even if they’re below the UK VAT threshold - for instance, if they want to reclaim input VAT on business expenses or work mainly with VAT-registered clients.

If you’re unsure whether you need to register or want to understand the implications for your business, our team can help you work through the numbers and decide on the right approach. We’re here to make the VAT rules easier to manage.

Are there benefits to charging VAT on services?

There are several benefits to charging VAT, even if your turnover hasn’t yet reached the registration threshold:

• You can reclaim input VAT: this allows you to claim VAT paid on eligible business expenses, including goods, services, and professional costs.
• Voluntary registration can enhance your credibility: being VAT-registered may help your business appear more established, especially to larger or VAT-registered clients.
• A VAT registration number can build trust: displaying your VAT number on invoices, your website, and company stationery may encourage other businesses to consider working with you.
• Reclaiming VAT on past costs: once registered, you can claim input tax on goods bought in the previous four years (if still in use) and services from the past six months - this is known as pre-registration input VAT

If you’re unsure whether VAT registration is the right step, The VAT People can work through your position and advise you on the most tax-efficient approach.

How do I manage VAT charged on services?

If you’re registered for VAT and charging it on your services, there are a few things you’ll need to stay on top of to remain compliant and avoid penalties.

• Keep accurate records: maintain clear records of all invoices issued and received, including the VAT amounts. This includes both sales (output VAT) and purchases (input VAT).
• Use Making Tax Digital (MTD)-compliant software: HMRC requires VAT-registered businesses to keep digital records and submit VAT returns using MTD-compatible software. Using these digital services helps reduce errors and keeps everything in one place.
• Submit VAT returns on time: most businesses need to file a VAT return every quarter. Your return should include the VAT you've charged on services, VAT you’re reclaiming, and what you owe or are owed by HMRC.
• Check VAT rates are applied correctly: make sure the correct rate (standard, reduced, or zero) is applied to your services, depending on what you’re providing.
• Reconcile your VAT account regularly: this helps you spot mistakes early and stay confident your records match what you’re submitting to HMRC.