Difference Between Zero-Rated Vat Items and Exempt Supplies

Zero-rated VAT items are goods and services that are taxable at 0%, including most food, children’s clothing and footwear, books and newspapers, public transport, new-build homes, prescription medicines and exports. A business that makes zero-rated sales still has to register for VAT if it passes the threshold, but it can reclaim VAT on its costs.

This guide explains which items are zero-rated, how zero-rated differs from exempt and reduced-rate supplies, how to deal with tricky items, and what it means for your VAT return. For the full rules, read our complete VAT guide and how to register for VAT.

The four VAT categories in the UK

Common zero-rated goods and services

Zero-rated vs exempt: why it matters

Zero-rated and exempt supplies both mean the customer pays no VAT, but the treatment for the seller is very different. If you make zero-rated sales, they count towards your VAT-taxable turnover, you can register for VAT and you can reclaim input VAT on your purchases. If you make exempt supplies, they do not count towards the VAT threshold, you cannot normally register for VAT, and you cannot usually reclaim VAT on related costs. Businesses with a mixture of taxable and exempt sales may be partially exempt and must apportion their VAT recovery.

Example

A small bakery sells bread and cakes for takeaway (zero-rated) and hot drinks and hot pies to eat in (standard rated). Its zero-rated bread and cold takeaway items count as taxable at 0%. It reclaims VAT on its flour, equipment and rent, and charges VAT at 20% on hot food and drinks. It must keep records showing the split between the two.

Tricky items: where the lines are drawn

• Hot takeaway food: standard rated at 20%, even though cold food for takeaway may be zero-rated.
• Chocolate biscuits and confectionery: standard rated, while plain biscuits and cakes can be zero-rated.
• Soft drinks and sports drinks: standard rated, while tea, coffee and milk are generally zero-rated.
• Children’s clothing: zero-rated if it is designed for young children and not suitable for older people, but items like school uniform may depend on their design.
• Protective clothing and car seats: may be standard or reduced rated.
• Digital publications: e-books and digital newspapers are zero-rated, but online courses are generally not.

If you are unsure, check HMRC’s VAT notices, such as the one on food products, or ask your accountant. Getting the rate wrong can lead to underpaid VAT, penalties and customer complaints.

What zero-rated sales mean for your VAT return

On your VAT return, zero-rated sales are included in your total sales figure but generate no output VAT. VAT on your purchases is reclaimed as input VAT, so a business that makes only zero-rated sales may regularly receive a repayment from HMRC. You still need valid VAT invoices for costs and must file returns on time, even if the VAT due is zero. Under Making Tax Digital your software handles the rates, but you must code each transaction correctly. See our guide to Making Tax Digital.

Should you register for VAT if you only sell zero-rated goods?

You do not have to register for VAT if all your sales are zero-rated, because you can apply to HMRC for an exemption from registration. However, you may choose to register voluntarily if you have significant VAT on your costs, because you will receive a repayment each period. Compare the benefit with the admin of filing returns.

Zero-rated VAT for London businesses

London food shops, bakeries, bookshops and children’s retailers frequently sell zero-rated items, while cafes and restaurants mix zero-rated and standard-rated sales. The rules on hot and cold food and eat-in or takeaway can be complex for hospitality businesses in areas such as Westminster, Camden and Hackney. We help businesses in every borough set up the right VAT coding and file returns. See our VAT registration service, bookkeeping services and bookkeeping in Hackney.

Common mistakes with zero-rated items

• Charging 20% on zero-rated goods or 0% on standard-rated goods.
• Treating zero-rated and exempt sales as the same.
• Not keeping evidence for exports.
• Failing to separate standard-rated and zero-rated sales in the books.
• Not reclaiming input VAT on costs because sales are zero-rated.

Practical tips for coding zero-rated items

• Create a separate VAT code for zero-rated sales in your software, so it is not mixed with exempt or outside-scope items.
• Check the rate for new products before you list them, and note the reason in your records.
• Use clear item descriptions on invoices, so the rate is easy to defend.
• Keep export evidence, such as shipping documents, for at least six years.
• Review your product list yearly, because rules and your range can change.

Other reduced and zero rates you may meet

Some supplies to charities, certain equipment for disabled people, and some building work on new homes or specified conversions also qualify for reduced or zero rates. These depend on the buyer, the evidence they provide and the nature of the work, so ask your accountant or check HMRC’s guidance before you apply them. Applying a relief you are not entitled to is a common cause of VAT assessments.

Key points to remember

Zero-rated means VAT at 0%, not no VAT. You still count the sales towards the £90,000 registration threshold, still file returns and can still reclaim VAT on costs. Exempt supplies behave differently, so check each product before you set up your VAT codes.

Frequently asked questions

What items are zero-rated for VAT in the UK?

Most food, children’s clothes and shoes, books and newspapers, public transport, new-build homes, prescription medicines, exports and some other items are zero-rated.

What is the difference between zero-rated and exempt?

Zero-rated supplies are taxable at 0%, so the seller can reclaim input VAT. Exempt supplies are outside VAT, so the seller usually cannot reclaim input VAT.

Is takeaway food zero-rated?

Hot takeaway food is standard rated at 20%. Cold takeaway food may be zero-rated.

Do I need to register for VAT if I sell zero-rated goods?

If your taxable turnover, which includes zero-rated sales, exceeds £90,000, you must register unless HMRC exempts you.

Can I reclaim VAT if I only make zero-rated sales?

Yes. You can reclaim input VAT on business costs and may receive a repayment.