Most freelancers, contractors and small businesses will be liable to pay standard rate VAT which currently stands at 17.5% – though this will increase to 20% from January 4 2011. But there are exceptions for some goods and services who pay either the reduced rate or nothing at all.

Reduced Rate

Reduced rate VAT currently stands at 5% and it will not be changing in 2011. The reduced rate only applies for certain services, or in certain situations.

HMRC lays down the differing circumstances which can affect whether or not a product or service should be supplied at this lesser rate. It can depend on:

* who’s providing them or buying them

* the location where they’re provided

* how they’re presented for sale

* the precise nature of the goods or service

* whether you obtain the necessary evidence

* whether you keep the right records

Zero rate VAT

Not much of an explanation needed here. Zero rate VAT applies to products and services which don’t have to add VAT onto their invoices.

Exempt.

If you’re exempt then you don’t have to add VAT or indeed be charged VAT.

For the most exhaustive list of services which fall outside standard rate VAT, try HMRC’s brilliant guide here.