What is Zero-Rated VAT?

Zero-rated VAT refers to goods and services that are taxable but have a VAT rate of 0%. This is a critical concept in the UK’s VAT system as it affects both businesses and consumers. While no VAT is charged on these items, businesses that supply zero-rated goods and services can still reclaim VAT on the costs they incur in producing or selling them. This guide will explain zero-rated VAT in detail, including what it is, the types of goods and services that qualify, and how it differs from VAT exemptions.

What Does Zero-Rated VAT Mean?

Zero-rated VAT is one of the VAT classifications used in the UK. When a good or service is zero-rated, the supplier does not charge VAT on the sale, but the supply is still considered taxable. Importantly, businesses that provide zero-rated goods and services can still claim back the VAT paid on their own business expenses related to those goods or services.

This makes zero-rated VAT distinct from VAT-exempt goods and services, where no VAT is charged, and businesses cannot reclaim VAT on related purchases.

For businesses that sell zero-rated goods or services, filing a VAT return is still mandatory, even though they won’t charge VAT on those sales. Zero-rated supplies also count toward the VAT registration threshold, meaning businesses dealing only in zero-rated goods may still need to register for VAT if their turnover exceeds the threshold (£85,000 as of 2024).

What Goods and Services are Zero-Rated?

In the UK, certain categories of goods and services are zero-rated for VAT purposes. Here is a list of the most common types of zero-rated goods and services:

1. Food and Drink

Most basic food items are zero-rated, including:

• Bread, rice, pasta, and flour

• Fruits and vegetables

• Meat and fish

• Milk, eggs, and cheese

• Tea and coffee (without added sweeteners or cream) However, not all food is zero-rated. For instance, confectionery, snacks, alcohol, and hot takeaway foods are subject to the standard 20% VAT rate.

2. Children’s Clothes and Footwear

Clothing and footwear designed for children under 14 years old are zero-rated. This applies to items such as:

• Shoes and boots for children

• School uniforms

• Baby clothes

3. Books and Printed Publications

Physical books, newspapers, and magazines are zero-rated for VAT. This also includes:

• Journals and periodicals

• Leaflets and brochures Note that digital versions of these publications (e-books and digital newspapers) were also zero-rated as of May 2020, in line with physical formats.

4. Public Transport

Passenger transport services, such as bus, train, and domestic air travel, are zero-rated. This also applies to ferry travel within the UK and some international journeys.

5. Water Supplies

Water for domestic and industrial use is zero-rated, though this does not extend to bottled water, which is subject to the standard VAT rate.

6. Drugs and Medicines

Prescribed medicines and drugs, as well as medical products such as prescriptions filled by chemists, are zero-rated. Non-prescription medicines, however, are typically subject to VAT.

7. Charity Fundraising

Some goods and services provided by charities, particularly those related to fundraising events, may be zero-rated for VAT purposes.

8. Exports

Goods exported to countries outside the UK are zero-rated. This means that UK businesses can sell goods overseas without adding VAT, but they need to keep accurate records as proof of export to avoid complications with HMRC.

9. Certain Health Products

Some health-related products, such as incontinence products, maternity pads, and certain other goods for medical purposes, are zero-rated.

Zero-Rated vs VAT-Exempt: What’s the Difference?

It’s crucial to distinguish between zero-rated VAT and VAT exemption, as they have different implications for businesses.

• Zero-rated goods and services: VAT is charged at 0%, meaning no VAT is payable by the customer, but businesses can still reclaim VAT on their inputs. Businesses selling zero-rated goods must also file VAT returns and may need to register for VAT if their turnover exceeds the threshold.

• VAT-exempt goods and services: No VAT is charged, and businesses cannot reclaim VAT on their inputs. Additionally, VAT-exempt sales do not count toward the VAT registration threshold.

Examples of VAT-exempt goods and services include:

• Education and training services

• Healthcare services provided by medical professionals

• Financial services (banking, insurance, mortgages)

• Some property transactions (e.g., renting or selling residential properties)

Why is Zero-Rated VAT Important for Businesses?

For businesses, selling zero-rated goods or services offers significant advantages. Here’s why:

1. Ability to Reclaim Input VAT: Even though the business does not charge VAT on sales, it can still reclaim VAT on expenses, such as raw materials, equipment, or services related to those sales. This helps reduce costs for businesses.

2. Helps Keep Prices Competitive: Since VAT is not added to the price of zero-rated goods and services, businesses can offer more competitive pricing, particularly for essential items like food, children’s clothing, and printed publications.

3. VAT Registration and Compliance: Zero-rated sales still count toward the VAT registration threshold, so businesses with turnover over £85,000 must register for VAT and submit VAT returns. Even though no VAT is charged on zero-rated items, HMRC requires businesses to report these sales.

How to Claim VAT on Zero-Rated Goods and Services

Businesses that supply zero-rated goods and services can claim back VAT on their purchases, provided they follow the proper procedures:

1. Keep Accurate Records: As with any VAT-registered business, it’s crucial to keep detailed records of all transactions, including purchases and sales. This documentation is required when filing VAT returns and if HMRC ever audits the business.

2. File VAT Returns on Time: Businesses must file VAT returns, typically quarterly, detailing their input and output VAT. Even if no VAT is charged on sales, businesses must still submit returns to HMRC.

3. Proof of Zero-Rated Status: In some cases, such as exports, businesses may need to provide proof that goods or services are eligible for zero-rated VAT. For exports, businesses must keep export documentation to show HMRC that the goods were sold outside the UK.

Zero-Rated VAT and Consumers

While businesses are responsible for charging and accounting for VAT, zero-rated goods and services also benefit consumers. The most significant advantage for consumers is that zero-rated goods do not include VAT in their final price. This makes essential items like food and children’s clothing more affordable.

For consumers, there is no need to worry about reclaiming VAT on zero-rated goods. Unlike businesses, consumers cannot reclaim VAT, but the savings from zero-rated VAT are passed on directly through lower prices.

Conclusion

Zero-rated VAT is an essential part of the UK’s tax system, allowing businesses to supply certain goods and services without charging VAT, while still reclaiming VAT on related expenses. It applies to key items such as food, children’s clothing, printed publications, and exports. Understanding the distinction between zero-rated and VAT-exempt goods is crucial for both businesses and consumers.

For businesses, zero-rated VAT offers the benefit of reclaiming input VAT while avoiding the need to charge customers VAT on their purchases. For consumers, it ensures that many essential goods and services remain affordable.