It can cause some confusion so in this guide, we answer the common question – what is zero rated VAT for UK businesses and their customers? We’ll also explain how to record zero rated VAT transactions from an accounting perspective.

Key takeaways: What is zero rated VAT?

  • With zero-rated VAT, the customer does not pay any VAT on certain items, but the supplier can reclaim VAT paid on costs associated with providing them.
  • Common examples of zero-rated goods and services include some basic foodstuffs, prescription medicines, and children’s clothing.
  • Businesses must report the sale of zero-rated goods and services on their VAT return. All zero-rated VAT items are still subject to VAT, albeit at a rate of 0% which allows for VAT reclaiming.
  • For exporting goods outside the UK, these goods may be treated as zero-rated VAT subject to conditions.
  • VAT exemption means certain goods and services do not incur any VAT charge.

Standard rated VAT vs zero rated VAT vs exempt from VAT

Products can be classified for VAT purposes as standard-rated, zero-rated, or exempt, and each category has distinct implications for both consumers and businesses.

  • If a product is standard-rated, VAT is charged at the full rate – currently 20% in the UK. So you pay an extra 20% in tax on top of the sale price.
  • If a product is zero-rated, it is still technically VAT-able, but the rate is 0%. This means businesses must include these sales in their VAT returns and can reclaim VAT on related expenses, but no VAT is charged to the customer. Examples include some food, children’s clothing and books.
  • If a product is exempt, there is no VAT to pay and these items are outside the scope of VAT. UK businesses selling exempt goods or services do not charge VAT and cannot reclaim VAT on associated costs. Common exempt items include some forms of healthcare, education and insurance.

The key difference is that zero-rated items are taxable (at 0%), allowing VAT recovery on costs, while exempt items are not taxable and do not allow VAT recovery on costs.

For wider reading, check out our guide answering the common query – do charities pay tax?

VAT rates and compliance

In the UK, goods and services can be either exempt from VAT or taxable, which could be standard-rated, reduced-rated, or zero-rated.

Zero-rated VAT means these supplies allow businesses to reclaim the VAT paid on inputs, reducing their costs. Certain goods and services are taxable at 0%.

In terms of the VAT rates on different goods, food and drink for human consumption is often zero-rated, but some items are always standard-rated, including:

  • Soft drinks
  • Mineral water
  • Sports drinks
  • Alcoholic drinks
  • Confectionery
  • Crisps 
  • Savoury snacks
  • Hot food
  • Hot takeaways
  • Ice cream
  • Catering

Zero-rated VAT means certain goods and services are taxable at 0%, allowing suppliers to reclaim VAT paid on associated costs. Exported goods from the UK are zero-rated, subject to conditions.

Zero-rated VAT can improve business cash flow by allowing recovery of input tax.

Additionally, find out how VAT cash accounting works for UK businesses, as well as the VAT flat rate scheme.

Implications for businesses

Businesses must register for VAT when their taxable turnover exceeds £90,000 as of 1 April 2024, confirmed by HMRC.

Businesses must include zero-rated transactions on their regular VAT returns and issue invoices – even though the VAT rate is 0%, to comply with regulations.

VAT-exempt supplies do not enable businesses to reclaim VAT, which can result in additional costs for businesses.

Exempt supplies are not incorporated into the taxable turnover for VAT purposes, while zero-rated supplies are.

Certain supplies of catering and hot takeaway food were liable to a reduced rate of 5% from 15 July 2020 to 31 March 2021. But from 1 April 2022 the normal VAT rules apply, and VAT is chargable at the standard rate, as confirmed by the Catering, takeaway food (VAT Notice 709/1).

Final thoughts: Zero rated VAT

Zero-rated VAT means that supplies are taxable at a rate of 0%. Businesses can reclaim VAT incurred on costs related to zero-rated supplies.

In contrast to zero-rated items, exempt items do not appear in a business’s taxable turnover.

Exempt goods and services include health, education, and insurance. Businesses cannot reclaim VAT incurred on costs related to exempt supplies.

Businesses must meet certain conditions for the reduced VAT rate to apply to energy-saving materials installed in dwellings, as per the Energy-saving materials and heating equipment (VAT Notice 708/6).

Now you know the answer to some common queries, including – what is a zero-rated VAT invoice? Do you pay VAT on zero-rated sales? And what is an example of zero-rated VAT?

About us: Accountants East London

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