VAT is a tax on consumption, charged on most goods and services supplied in the UK. A VAT-registered business adds it to what it sells (output tax), reclaims it on most of what it buys for the business (input tax), and pays the difference to HMRC. If input tax exceeds output tax, HMRC repays the difference.
The effect is that the tax is collected in stages along a supply chain but is ultimately borne by the final consumer. Registered businesses in the middle are collecting on HMRC’s behalf rather than paying it themselves — which is why VAT you have charged is best thought of as money held on account, not as revenue.
Not everything carries the same treatment. Supplies can be standard-rated, reduced-rated, zero-rated, exempt or outside the scope, and the distinction matters. Zero-rated supplies still allow input tax recovery; exempt ones generally do not, which is why partially exempt businesses have extra calculations to do. The rates themselves, and which goods and services fall into each category, are set in legislation and listed on gov.uk.
Registration is compulsory once taxable turnover passes a threshold set by government, tested on a rolling twelve-month basis and also against expected future turnover. You can also register voluntarily below it, which some businesses do in order to recover input tax; the registration and deregistration thresholds are published on gov.uk. Once registered, you file returns under Making Tax Digital and keep records in a compatible digital format.
For asset finance, the key point is that VAT treatment differs by agreement type — broadly charged up front on hire purchase and on each rental for leases — which changes when you can reclaim it. Confirm the specifics with your accountant before you sign.
This is general information, not tax advice. Confirm your own position with your accountant or HMRC.