diff --git a/policyengine_uk/entities.py b/policyengine_uk/entities.py
index d83ee53b2..d68f16bd2 100644
--- a/policyengine_uk/entities.py
+++ b/policyengine_uk/entities.py
@@ -43,4 +43,19 @@
     is_person=True,
 )
 
-entities = [Household, BenUnit, Person]
+Firm = build_entity(
+    key="firm",
+    plural="firms",
+    label="Firm",
+    doc="A business entity that may be subject to VAT and other business taxes.",
+    roles=[
+        {
+            "key": "owner",
+            "plural": "owners",
+            "label": "Owner",
+            "doc": "A person who owns or has an interest in the firm.",
+        }
+    ],
+)
+
+entities = [Household, BenUnit, Person, Firm]
diff --git a/policyengine_uk/parameters/gov/hmrc/vat/deregistration_threshold.yaml b/policyengine_uk/parameters/gov/hmrc/vat/deregistration_threshold.yaml
new file mode 100644
index 000000000..eb7642b1b
--- /dev/null
+++ b/policyengine_uk/parameters/gov/hmrc/vat/deregistration_threshold.yaml
@@ -0,0 +1,10 @@
+description: VAT deregistration threshold - firms can deregister if turnover falls below this
+values:
+  2017-04-01: 83000
+  2024-04-01: 88000
+metadata:
+  unit: currency-GBP
+  reference:
+    - title: HMRC VAT registration thresholds
+      href: https://www.gov.uk/vat-registration-thresholds
+  label: VAT deregistration threshold
\ No newline at end of file
diff --git a/policyengine_uk/parameters/gov/hmrc/vat/registration_threshold.yaml b/policyengine_uk/parameters/gov/hmrc/vat/registration_threshold.yaml
new file mode 100644
index 000000000..0d43a234e
--- /dev/null
+++ b/policyengine_uk/parameters/gov/hmrc/vat/registration_threshold.yaml
@@ -0,0 +1,10 @@
+description: VAT registration threshold - firms with taxable turnover above this must register for VAT
+values:
+  2017-04-01: 85000
+  2024-04-01: 90000
+metadata:
+  unit: currency-GBP
+  reference:
+    - title: HMRC VAT registration thresholds
+      href: https://www.gov.uk/vat-registration-thresholds
+  label: VAT registration threshold
\ No newline at end of file
diff --git a/policyengine_uk/parameters/gov/hmrc/vat/zero_rate.yaml b/policyengine_uk/parameters/gov/hmrc/vat/zero_rate.yaml
new file mode 100644
index 000000000..9a0d22a52
--- /dev/null
+++ b/policyengine_uk/parameters/gov/hmrc/vat/zero_rate.yaml
@@ -0,0 +1,9 @@
+description: Zero-rated VAT (0% rate) applies to essential items like most food, children's clothes, books
+values:
+  1973-04-01: 0.0
+metadata:
+  unit: /1
+  reference:
+    - title: HMRC VAT rates
+      href: https://www.gov.uk/vat-rates
+  label: VAT zero rate
\ No newline at end of file
diff --git a/policyengine_uk/tax_benefit_system.py b/policyengine_uk/tax_benefit_system.py
index e76cddbd9..c2c4e95f4 100644
--- a/policyengine_uk/tax_benefit_system.py
+++ b/policyengine_uk/tax_benefit_system.py
@@ -14,7 +14,7 @@
 from policyengine_core.variables import Variable
 
 # PolicyEngine UK imports
-from policyengine_uk.entities import BenUnit, Household, Person
+from policyengine_uk.entities import BenUnit, Household, Person, Firm
 from policyengine_uk.parameters.gov.contrib.create_private_pension_uprating import (
     add_private_pension_uprating_factor,
 )
@@ -108,16 +108,17 @@ def __init__(self):
         self.variables = {}
 
         # Create copies of entity classes to avoid modifying originals
-        person, benunit, household = (
+        person, benunit, household, firm = (
             copy.copy(Person),
             copy.copy(BenUnit),
             copy.copy(Household),
+            copy.copy(Firm),
         )
 
         # Set up entities
-        self.entities = [person, benunit, household]
+        self.entities = [person, benunit, household, firm]
         self.person_entity = person
-        self.group_entities = [benunit, household]
+        self.group_entities = [benunit, household, firm]
         self.group_entity_keys = [entity.key for entity in self.group_entities]
 
         # Link entities to this tax-benefit system
diff --git a/policyengine_uk/tests/entities/test_firm_entity.py b/policyengine_uk/tests/entities/test_firm_entity.py
new file mode 100644
index 000000000..270858211
--- /dev/null
+++ b/policyengine_uk/tests/entities/test_firm_entity.py
@@ -0,0 +1,66 @@
+import pytest
+from policyengine_uk import CountryTaxBenefitSystem
+
+
+def test_firm_entity_exists():
+    """Test that the Firm entity is defined in the tax-benefit system."""
+    system = CountryTaxBenefitSystem()
+
+    # Find Firm entity in the list
+    firm_entity = None
+    for entity in system.entities:
+        if entity.key == "firm":
+            firm_entity = entity
+            break
+
+    assert firm_entity is not None, "Firm entity not found"
+    assert firm_entity.key == "firm"
+    assert firm_entity.plural == "firms"
+    assert firm_entity.label == "Firm"
+
+
+def test_firm_entity_has_owner_role():
+    """Test that the Firm entity has an owner role linking to Person."""
+    system = CountryTaxBenefitSystem()
+
+    # Find Firm entity
+    firm_entity = None
+    for entity in system.entities:
+        if entity.key == "firm":
+            firm_entity = entity
+            break
+
+    assert firm_entity is not None, "Firm entity not found"
+
+    # Check that the entity has roles
+    assert len(firm_entity.roles) > 0
+
+    # Find the owner role
+    owner_role = None
+    for role in firm_entity.roles:
+        if role.key == "owner":
+            owner_role = role
+            break
+
+    assert owner_role is not None
+    assert owner_role.plural == "owners"
+    assert owner_role.label == "Owner"
+
+
+def test_firm_entity_documentation():
+    """Test that the Firm entity has proper documentation."""
+    system = CountryTaxBenefitSystem()
+
+    # Find Firm entity
+    firm_entity = None
+    for entity in system.entities:
+        if entity.key == "firm":
+            firm_entity = entity
+            break
+
+    assert firm_entity is not None, "Firm entity not found"
+    assert firm_entity.doc is not None
+    assert (
+        "business" in firm_entity.doc.lower()
+        or "firm" in firm_entity.doc.lower()
+    )
diff --git a/policyengine_uk/tests/policy/firm_vat/test_firm_vat.py b/policyengine_uk/tests/policy/firm_vat/test_firm_vat.py
new file mode 100644
index 000000000..51a26b540
--- /dev/null
+++ b/policyengine_uk/tests/policy/firm_vat/test_firm_vat.py
@@ -0,0 +1,113 @@
+import pytest
+import numpy as np
+from policyengine_uk import CountryTaxBenefitSystem
+
+
+def test_firm_turnover_variable():
+    """Test that firm_turnover variable exists and works correctly."""
+    system = CountryTaxBenefitSystem()
+
+    # Check variable exists
+    assert "firm_turnover" in system.variables
+
+    variable = system.variables["firm_turnover"]
+    assert variable.value_type == float
+    assert variable.entity.key == "firm"
+    assert variable.label == "Firm turnover"
+
+
+def test_firm_vat_registered_variable():
+    """Test that firm_vat_registered variable exists and calculates correctly."""
+    system = CountryTaxBenefitSystem()
+
+    # Check variable exists
+    assert "firm_vat_registered" in system.variables
+
+    variable = system.variables["firm_vat_registered"]
+    assert variable.value_type == bool
+    assert variable.entity.key == "firm"
+
+
+def test_vat_registration_threshold():
+    """Test VAT registration threshold of £90,000."""
+    from policyengine_uk.simulation import Simulation
+
+    # Test firm below threshold
+    sim_below = Simulation(
+        situation={
+            "firms": {"test_firm": {"firm_turnover": {"2024": 85_000}}},
+            "people": {"p": {}},
+            "benunits": {"b": {"members": ["p"]}},
+            "households": {"h": {"members": ["p"]}},
+        }
+    )
+    vat_registered = sim_below.calculate("firm_vat_registered", "2024")
+    assert vat_registered[0] == False
+
+    # Test firm above threshold
+    sim_above = Simulation(
+        situation={
+            "firms": {"test_firm": {"firm_turnover": {"2024": 95_000}}},
+            "people": {"p": {}},
+            "benunits": {"b": {"members": ["p"]}},
+            "households": {"h": {"members": ["p"]}},
+        }
+    )
+    vat_registered = sim_above.calculate("firm_vat_registered", "2024")
+    assert vat_registered[0] == True
+
+
+def test_firm_vat_on_sales():
+    """Test VAT calculation on firm sales."""
+    from policyengine_uk.simulation import Simulation
+
+    simulation = Simulation(
+        situation={
+            "firms": {
+                "firm_1": {
+                    "firm_turnover": {"2024": 100_000},
+                    "firm_standard_rated_supplies": {"2024": 80_000},
+                    "firm_reduced_rated_supplies": {"2024": 10_000},
+                    "firm_zero_rated_supplies": {"2024": 10_000},
+                }
+            },
+            "people": {"p": {}},
+            "benunits": {"b": {"members": ["p"]}},
+            "households": {"h": {"members": ["p"]}},
+        }
+    )
+
+    vat_on_sales = simulation.calculate("firm_vat_on_sales", "2024")
+    # Standard rate 20% on £80,000 = £16,000
+    # Reduced rate 5% on £10,000 = £500
+    # Zero rate 0% on £10,000 = £0
+    # Total = £16,500
+    expected = 16_500
+    assert np.isclose(vat_on_sales[0], expected, rtol=0.01)
+
+
+def test_firm_net_vat_liability():
+    """Test net VAT liability calculation (output VAT - input VAT)."""
+    from policyengine_uk.simulation import Simulation
+
+    simulation = Simulation(
+        situation={
+            "firms": {
+                "firm_1": {
+                    "firm_turnover": {"2024": 100_000},
+                    "firm_standard_rated_supplies": {"2024": 100_000},
+                    "firm_vat_on_purchases": {"2024": 5_000},
+                }
+            },
+            "people": {"p": {}},
+            "benunits": {"b": {"members": ["p"]}},
+            "households": {"h": {"members": ["p"]}},
+        }
+    )
+
+    net_vat = simulation.calculate("firm_net_vat_liability", "2024")
+    # Output VAT: 20% of £100,000 = £20,000
+    # Input VAT: £5,000
+    # Net liability: £20,000 - £5,000 = £15,000
+    expected = 15_000
+    assert np.isclose(net_vat[0], expected, rtol=0.01)
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_net_vat_liability.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_net_vat_liability.py
new file mode 100644
index 000000000..1f464b23f
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_net_vat_liability.py
@@ -0,0 +1,20 @@
+from policyengine_uk.model_api import *
+
+
+class firm_net_vat_liability(Variable):
+    value_type = float
+    entity = Firm
+    label = "Net VAT liability"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Net VAT liability (output VAT minus input VAT)"
+
+    def formula(firm, period, parameters):
+        vat_registered = firm("firm_vat_registered", period)
+        output_vat = firm("firm_vat_on_sales", period)
+        input_vat = firm("firm_vat_on_purchases", period)
+
+        net_vat = output_vat - input_vat
+
+        # Only registered firms pay/reclaim VAT
+        return net_vat * vat_registered
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_reduced_rated_supplies.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_reduced_rated_supplies.py
new file mode 100644
index 000000000..94c7fdf57
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_reduced_rated_supplies.py
@@ -0,0 +1,10 @@
+from policyengine_uk.model_api import *
+
+
+class firm_reduced_rated_supplies(Variable):
+    value_type = float
+    entity = Firm
+    label = "Reduced-rated supplies"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Value of firm's supplies subject to reduced VAT rate"
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_standard_rated_supplies.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_standard_rated_supplies.py
new file mode 100644
index 000000000..33a970534
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_standard_rated_supplies.py
@@ -0,0 +1,10 @@
+from policyengine_uk.model_api import *
+
+
+class firm_standard_rated_supplies(Variable):
+    value_type = float
+    entity = Firm
+    label = "Standard-rated supplies"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Value of firm's supplies subject to standard VAT rate"
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_turnover.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_turnover.py
new file mode 100644
index 000000000..0ce040e85
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_turnover.py
@@ -0,0 +1,10 @@
+from policyengine_uk.model_api import *
+
+
+class firm_turnover(Variable):
+    value_type = float
+    entity = Firm
+    label = "Firm turnover"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Annual turnover of the firm from all business activities"
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_on_purchases.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_on_purchases.py
new file mode 100644
index 000000000..5cfb645eb
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_on_purchases.py
@@ -0,0 +1,10 @@
+from policyengine_uk.model_api import *
+
+
+class firm_vat_on_purchases(Variable):
+    value_type = float
+    entity = Firm
+    label = "VAT on purchases"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Total VAT paid on firm's purchases (input VAT)"
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_on_sales.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_on_sales.py
new file mode 100644
index 000000000..104f10df7
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_on_sales.py
@@ -0,0 +1,30 @@
+from policyengine_uk.model_api import *
+
+
+class firm_vat_on_sales(Variable):
+    value_type = float
+    entity = Firm
+    label = "VAT on sales"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Total VAT charged on firm's sales (output VAT)"
+
+    def formula(firm, period, parameters):
+        vat_registered = firm("firm_vat_registered", period)
+
+        if not vat_registered.any():
+            return firm.empty_array()
+
+        vat_params = parameters(period).gov.hmrc.vat
+
+        standard_supplies = firm("firm_standard_rated_supplies", period)
+        reduced_supplies = firm("firm_reduced_rated_supplies", period)
+        zero_supplies = firm("firm_zero_rated_supplies", period)
+
+        standard_vat = standard_supplies * vat_params.standard_rate
+        reduced_vat = reduced_supplies * vat_params.reduced_rate
+        zero_vat = zero_supplies * vat_params.zero_rate
+
+        total_vat = standard_vat + reduced_vat + zero_vat
+
+        return total_vat * vat_registered
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_registered.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_registered.py
new file mode 100644
index 000000000..f022c2083
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_vat_registered.py
@@ -0,0 +1,14 @@
+from policyengine_uk.model_api import *
+
+
+class firm_vat_registered(Variable):
+    value_type = bool
+    entity = Firm
+    label = "Firm is VAT registered"
+    definition_period = YEAR
+    documentation = "Whether the firm is registered for VAT"
+
+    def formula(firm, period, parameters):
+        turnover = firm("firm_turnover", period)
+        threshold = parameters(period).gov.hmrc.vat.registration_threshold
+        return turnover > threshold
diff --git a/policyengine_uk/variables/gov/hmrc/vat/firm/firm_zero_rated_supplies.py b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_zero_rated_supplies.py
new file mode 100644
index 000000000..6c457c0fe
--- /dev/null
+++ b/policyengine_uk/variables/gov/hmrc/vat/firm/firm_zero_rated_supplies.py
@@ -0,0 +1,10 @@
+from policyengine_uk.model_api import *
+
+
+class firm_zero_rated_supplies(Variable):
+    value_type = float
+    entity = Firm
+    label = "Zero-rated supplies"
+    definition_period = YEAR
+    unit = GBP
+    documentation = "Value of firm's supplies subject to zero VAT rate"