Table of contents
Table of contents
The rate of VAT you charge on taxable sales as a VAT-registered business depends on the goods or services you’re supplying. Most items are subject to the standard rate of 20% VAT, but there are other categories too. In this article we explain the difference between VAT zero rated and VAT exempt, and what this means for your records.
It’s the final two on the list that often cause the most confusion, because zero-rating something seems like it might do the same job as making it VAT exempt. They are actually separate, and are treated in different ways. Which we’ll explain next.
The easiest way to explain how 0% rated VAT is different from VAT exemption is to compare the two.
What is 0% (zero rated) VAT?
0% or zero-rated VAT goods and services are still taxable, but the rate of VAT charged is 0%.
Goods and services which are zero-rated for VAT include:
What is VAT exemption?
Goods and services exempt from VAT are not taxable, so no VAT can be charged on them.
Examples of VAT-exempt goods and services include:
So why is it important to identify zero-rated items separately to VAT exempt ones? Well:
This is a key point because of the effect it can have on tax efficiency.
When a business charges VAT on taxable sales (you’ll sometimes see this called output tax) it is essentially collecting VAT from its customers, and then passing it along to HMRC when it pays its VAT bill.
The crucial thing here is that zero rated items don’t actually incur a charge, because the VAT is 0%. If a business sells only (or mostly) 0% rated items, the VAT it pays on purchases will probably be more than the VAT it collects from customers.
This means you can claim the difference back from HMRC on a regular basis, which is great news for tax efficiency! It’s why some businesses decide to register for VAT voluntarily, even though their turnover hasn’t reached the registration threshold.
A business which only supplies VAT-exempt items can’t take advantage of this though, because it can’t register for VAT.
Businesses should record all of their transactions anyway, because this helps you stay on top of your finances, make well-informed decisions, and submit accurate tax returns.
If your business deals with both zero-rated and VAT-exempt goods or services, then some of your sales are ‘partly exempt’ so it’s even more important to categorise everything correctly! When you make your VAT submission, it will show both your zero-rated sales as well as those which are exempt.
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A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.
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