Zero Rated vs VAT Exempt Guide
Zero-rated vs VAT exempt supplies in the UK explained: 0% taxable rate vs exempt non-taxable, input VAT reclaim rules, £90,000 threshold impact, and partial exemption.
In one sentence
A zero-rated supply is taxable at 0%, so you can reclaim input VAT and the sales count towards the £90,000 registration threshold. An exempt supply is not taxable: no VAT is charged, you usually cannot reclaim input VAT and the sales do not count towards the threshold.
Zero-rated vs VAT exempt: key differences explained
A zero-rated supply is a sale that is taxable, but the VAT rate is 0%. A VAT-exempt supply is a sale that is not taxable at all. Both put no VAT on your customer's invoice, so "no VAT" on an invoice does not tell you which one applies.
The difference matters for two things: whether you can reclaim input VAT on business costs, and whether the sales count towards the £90,000 VAT registration threshold.
Quick Comparison Table
| Feature | Zero-Rated Supplies (0%) | VAT Exempt Supplies |
|---|---|---|
| VAT Charged on Invoices | 0% | 0% (no VAT applied) |
| Taxable Status | Taxable supply (at 0% rate) | Exempt supply (within the scope of VAT, but no VAT is charged) |
| Reclaim Input VAT on Costs? | Yes (reclaim 100% of input VAT) | No (input VAT is blocked) |
| Counts Toward £90k Threshold? | Yes (counts as taxable turnover) | No (does not count) |
| Typical UK Examples | Books, basic food, children's clothes, exports | Residential rent, insurance, healthcare, education |
1. Zero-Rated Supplies (0% Taxable Rate)
Zero-rated goods and services are taxable supplies, but the rate of VAT charged is 0%.
- Input VAT Advantage: Because zero-rated sales are taxable, you are entitled to register for VAT and reclaim 100% of the input VAT you pay on your business overheads, software, materials, and equipment.
- Registration Trap: Sales of zero-rated goods count toward the £90,000 rolling 12-month VAT threshold. A food wholesaler or exporter with £100,000 of zero-rated sales must register for VAT, even though the VAT charged to customers is nil. If you sell mainly or only zero-rated items you can instead apply to HMRC for exemption from registration, but you then cannot reclaim input VAT.
2. VAT Exempt Supplies (No VAT Charged)
Exempt goods and services fall within the scope of UK VAT but no VAT is charged on them, under Schedule 9 of the VATA 1994. This is different from supplies that are outside the scope of VAT altogether.
- Input VAT Block: If your business makes purely exempt supplies (e.g. a residential property landlord or insurance broker), you cannot register for VAT to reclaim input VAT on your expenses.
- Threshold Exclusion: Income from exempt supplies does not count toward the £90,000 VAT registration threshold. A landlord earning £250,000 in residential rental income has no VAT registration requirement.
3. What happens if you sell both? (Partial Exemption)
If your business makes a mix of taxable (standard or zero-rated) and exempt supplies, you are classed by HMRC as a Partially Exempt business.
You must perform a monthly or quarterly Partial Exemption calculation to apportion your input VAT:
- Directly Attributable Input VAT: Input VAT incurred directly for taxable sales is 100% recoverable. Input VAT incurred directly for exempt sales is non-recoverable.
- Overheads (Residual Input VAT): Shared overhead costs (like rent or accountancy fees) are split based on the ratio of taxable turnover to total turnover.
- De Minimis Rule: You can reclaim exempt input VAT if it totals less than £625 per month on average and is less than 50% of your total input VAT.
Read our guide on the £90,000 UK VAT registration threshold or see how our specialist VAT accounting service manages your Partial Exemption and MTD returns. Source: GOV.UK: exemption and partial exemption from VAT.
Confused by Zero-Rated or Exempt VAT rules?
Book a 30-minute call with an experienced UK VAT accountant. We will review your sales classification, check input VAT reclaims, and set up your Partial Exemption calculations.
Book a call →Frequently asked questions
What are zero-rated supplies?
Zero-rated supplies are goods and services that are taxable but charged at 0% VAT. GOV.UK lists examples such as most food, books and newspapers, children's clothes and shoes, and exports. Because they are taxable, you can register for VAT, reclaim input VAT on costs and must count the sales towards the £90,000 registration threshold.
What is the difference between zero-rated and exempt VAT?
Both show no VAT on the invoice, but the treatment is different. Zero-rated sales are taxable at 0%, so you can reclaim input VAT and the sales count towards the £90,000 threshold. Exempt sales are not taxable, so you usually cannot reclaim input VAT on related costs and the sales do not count towards the threshold.
Is no VAT the same as zero-rated?
No. An invoice with no VAT on it can mean the sale is zero-rated, exempt or outside the scope of VAT, or that the seller is not VAT registered. Only zero-rated sales are taxable at 0%. Check how the sale is classified before you decide whether you can reclaim VAT or must register.
What does a zero-rated invoice show?
A VAT invoice for a zero-rated sale should show the goods or services, the price before VAT, the VAT rate as 0% and a VAT amount of nil. The sale is still reported on your VAT return, in the box for the total value of sales excluding VAT.
What does VAT exempt mean?
VAT exempt means a sale is within the scope of VAT but no VAT is charged and it is not taxable. GOV.UK lists insurance, finance and credit, education and training, charity fundraising events, subscriptions to membership organisations, and selling, leasing and letting of commercial land and buildings, although the commercial property exemption can be waived by opting to tax. Letting a home for permanent residential use is also exempt. Exempt sales do not count towards the £90,000 registration threshold. If all your sales are exempt you cannot register for VAT or recover VAT on your costs. Exempt is different from zero-rated, which is taxable at 0%, and from outside the scope of VAT, such as voluntary donations to charity.
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