What is zero-rated VAT?
Zero-rated VAT means goods or services are VAT-taxable but at a rate of 0%, so the customer pays no VAT but the seller can still reclaim input VAT.
What zero-rated VAT means
Zero-rated supplies are part of the VAT system. They are taxable, just at 0%. Common UK examples include:
- most food and drink for home consumption, but not catering, hot takeaway food, confectionery, crisps or alcohol
- books, newspapers and magazines, including digital versions
- children's clothing and footwear
- public transport such as buses and trains
- the construction and first sale of new homes
- goods exported outside the UK
Zero-rated sales count towards the £90,000 VAT registration threshold.
Example
A bookshop sells £120,000 of books, which are zero-rated, and £10,000 of greetings cards and gifts, which are standard-rated, both excluding VAT. In the same year it pays £6,000 of VAT on stock, shopfitting and running costs.
| Item | Amount |
|---|---|
| Output VAT on £10,000 of standard-rated sales | £2,000 |
| Output VAT on £120,000 of books | £0 |
| Input VAT reclaimed | £6,000 |
| VAT repayment from HMRC | £4,000 |
Because zero-rated businesses can reclaim input VAT, they often receive regular repayments.
The UK VAT rates
| Rate | Applies to |
|---|---|
| Standard rate, 20% | Most goods and services |
| Reduced rate, 5% | Domestic fuel and power, children's car seats, some energy-saving installations |
| Zero rate, 0% | Most food, books, children's clothes, public transport, new homes |
Exempt supplies sit outside these rates altogether. A business can make a mix of all four types of sale, and its VAT records must keep them separate.
Exports of goods outside the UK are zero-rated only if you keep evidence that the goods left the country, such as shipping documents, within the time limits. Without it, standard-rate VAT is due.
Sales of services to overseas business customers are usually outside the scope of UK VAT rather than zero-rated, which affects how they are reported.
Why it matters for your business
The line between zero-rated and standard-rated can be fine. A cold sandwich is zero-rated; the same sandwich toasted is standard-rated. Getting it wrong means either overcharging customers or underpaying HMRC. Cloudkeepers checks the VAT treatment of clients' products when they register.
Zero-rated vs VAT exempt
| Zero-rated | Exempt | |
|---|---|---|
| VAT charged to customers | 0% | None |
| Counts towards the VAT threshold | Yes | No |
| Can reclaim related input VAT | Yes | Generally no |
Exempt supplies include most insurance, financial services, education and healthcare.
Common questions
If your zero-rated turnover goes over the threshold, yes, because zero-rated sales are taxable. However, you can ask HMRC for an exemption from registration if almost all your sales are zero-rated, although you would then give up the right to reclaim input VAT.
No. Basic food for home consumption is zero-rated, but catering, hot takeaway food, food eaten on the premises, confectionery, crisps, ice cream, soft drinks and alcohol are standard-rated. The rules include many detailed exceptions, which is why food businesses often need advice.