Zero Rated VAT: What It Covers and How It Differs From Exempt

Zero rated VAT means VAT is charged at a rate of 0%. The supply is still a taxable supply, so the seller registers for VAT, files returns and recovers the VAT on costs in the ordinary way. That is what separates it from exempt, where no VAT is charged and none of the VAT on costs comes back.

That one sentence carries almost everything a business owner needs. Both a zero-rated invoice and an exempt invoice show the customer £0 of VAT, which is why the two words are used interchangeably in conversation and why so many businesses get the treatment wrong. They are not interchangeable. They sit on opposite sides of the VAT system and they produce opposite cash results for the person issuing the invoice.

This page sets out the rule, the categories, the boundary between zero-rated and exempt trade by trade, the registration inversion that catches zero-rated sellers out, and the insurance question that is the single most common version of the exempt-versus-zero-rated confusion.

The rule: Schedule 8 is a rate, Schedule 9 is a category

UK VAT law puts the two lists in two different places, and the drafting tells you what each one does.

Zero-rated supplies are listed in Value Added Tax Act 1994, Schedule 8 (Zero-rating), indexed in Part I and set out in Part II. Schedule 8 does not take anything out of the VAT system. It applies a rate of 0% to a supply that remains fully inside it. The supply is taxable. It counts as taxable turnover. It goes in box 6 of the VAT return. It carries the right to deduct input tax under the ordinary rules in sections 25 and 26 of the Act.

Exempt supplies are listed in Value Added Tax Act 1994, Schedule 9 (Exemptions). Schedule 9 does something different. It removes a category of supply from the taxable base altogether. There is no rate, because there is nothing to apply a rate to. An exempt supply is not a taxable supply, so it does not count toward the registration threshold, and the VAT on costs attributable to it is not deductible. It is a real cost to the business making the supply.

So the question "is this zero-rated or exempt?" is never a question about the rate on the invoice. Both answers put nothing on the invoice. It is a question about which schedule the supply falls into, and the consequence lands entirely on the seller's side of the transaction.

A third possibility sits behind both: a transaction can be outside the scope of VAT, meaning it is not a supply for consideration at all. A freely given donation to a charity is the classic example. Outside the scope also blocks recovery, and, like exemption, it is not a rate.

Zero-rated against exempt: the boundary, trade by trade

The table below puts real trades on each side of the line. Every business in the left column and every business in the right column issues invoices showing no VAT. Only one column gets the VAT on its costs back.

Zero-rated: 0% on the invoice, VAT on costs recovered	Exempt: no VAT on the invoice, VAT on costs lost
A printer's 5,000 leaflets for a local estate agent	A broker's commission for arranging that estate agent's office insurance
A baker's cold loaves and uncut cakes sold over the counter	A funeral director's arrangements for the disposal of remains
A bookshop's paperbacks, and the ebook versions of the same titles	A private physiotherapy clinic's treatment sessions
A coach operator's 52-seat airport transfer	A sports club's playing membership subscription
A children's outfitter's coats inside the measurement limits	A commercial landlord's rent on a unit with no option to tax

Both invoices show £0 of VAT, and only the left-hand column gets the VAT on its costs back.

Read down the right-hand column and you can see what exemption actually costs. The broker absorbs the VAT on their software, their office and their professional indemnity cover. The funeral director absorbs the VAT on the hearse. The physiotherapy clinic absorbs the VAT on the treatment couches and the rent. The sports club absorbs the VAT on the mower and the clubhouse repairs. None of it is recoverable, so all of it has to be priced into what they charge.

Read down the left-hand column and the position reverses. The printer reclaims the VAT on paper, ink and the press. The baker reclaims the VAT on flour, ovens and the shop fit. The bookshop reclaims the VAT on shelving, the till system and the rent. They charge their customers nothing, and they still get the input tax back.

What is zero-rated

Zero-rating is a closed statutory list. There is no general principle that essentials are zero-rated and luxuries are not; there is only the question of whether a supply falls inside one of the groups in Schedule 8. Those groups are not numbered consecutively, because some have been repealed or are spent over the life of the Act, so a gap in the numbering is normal and not a sign that something has been missed.

The main categories a UK owner-managed business is likely to meet are these.

Food for human consumption

Most food of a kind used for human consumption is zero-rated, and the structure of the rule matters more than any list of products. The group starts with general items that are zero-rated, then pulls a set of excepted items back to the standard rate, then pushes a set of items overriding the exceptions back to zero. The excepted items include ice cream and similar frozen products, confectionery, alcoholic drinks, other beverages, sports drinks, savoury snacks such as crisps and salted nuts packaged ready to eat, pet food, and home brewing materials.

Two lines inside that structure are settled and worth stating plainly. A cake is zero-rated even when it is covered in chocolate, because the confectionery exception carves cakes out without qualification. A biscuit wholly or partly covered in chocolate is standard-rated. Beyond those two points, product classification turns on the specific facts of the specific product, and no responsible page rules on a borderline item from a distance.

Separately, zero-rating is denied to any supply of food in the course of catering, which covers consumption on the premises and hot takeaway food. That is a different question from whether the food itself is zero-rated, and it is where most food-trade liability errors actually happen. HMRC sets the tests out in VAT Notice 709/1 and the product rules in VAT Notice 701/14.

Books and printed matter

Schedule 8 Group 3 zero-rates, in its own words, books, booklets, brochures, pamphlets and leaflets (item 1); newspapers, journals and periodicals (item 2); children's picture books and painting books (item 3); music, printed, duplicated or manuscript (item 4); maps, charts and topographical plans (item 5); and covers, cases and other articles supplied with items 1 to 5 (item 6).

Item 7 extends the zero rate to electronic versions of the publications in items 1 to 3, excluding publications which are wholly or predominantly devoted to advertising, or which consist wholly or predominantly of audio or video content. Item 7 was inserted with effect from 1 May 2020 by the Value Added Tax (Extension of Zero-Rating to Electronically Supplied Books etc.) (Coronavirus) Order 2020 (S.I. 2020/459). The practical effect is that a paperback and the ebook of the same title now carry the same treatment, which was not the case before that date.

The organising idea, and the one that saves a printer from getting this wrong, is that the zero rate attaches to reading matter, not to paper. Business stationery, letterheads, compliment slips, business cards, order books, forms, questionnaires, unused diaries and posters for public display are all standard-rated. VAT Notice 701/10 carries the full boundary, and the printing side of it is covered on VAT on printing.

Children's clothing and footwear

Young children's clothing and footwear is zero-rated under Schedule 8 Group 16. HMRC's published practice in VAT Notice 714 applies four cumulative conditions. The article must be an article of clothing or footwear; it must not be made of fur; it must be designed for young children; and it must be suitable only for young children. All four have to be satisfied.

The third condition is applied through a size-based test. HMRC publishes maximum measurement tables derived from the relevant British Standard for an average child up to the eve of their fourteenth birthday, which is the point at which, in HMRC's words, body dimensions begin to merge with those of the general adult population. The notice sets out the maxima garment by garment, and a retailer working out the liability of a particular line should read them there rather than rely on a summary.

The consequence for anyone behind a till is the part worth remembering: there is no age test at the point of sale. A garment above the maximum measurement is standard-rated even where the buyer is plainly a child, and a garment within the measurements is zero-rated even where the buyer is an adult. The fourth condition, "suitable only for young children", is what stops adult-sized items being sold through as children's wear.

Passenger transport

Passenger transport is zero-rated rather than exempt, which surprises people who assume anything without VAT on the ticket must be exempt. It sits in Schedule 8 Group 8, item 4(a), which zero-rates the transport of passengers in any vehicle, ship or aircraft designed or adapted to carry not less than 10 passengers.

That single number does the work. A bus, a coach, a train or a large minibus meets it, so the fare is zero-rated and the operator recovers input tax on the vehicle, the fuel and the depot. A taxi, a private hire car or a minicab does not meet it, so the fare is standard-rated at 20%. The operational detail sits on VAT on transport, and HMRC's practice is in VAT Notice 744A.

The rest of the list

The other groups a business may meet include sewerage services and water; talking books and equipment for people who are blind or disabled; the construction of new residential buildings and work to protected buildings; international services and exports; caravans and houseboats; gold and bank notes in defined circumstances; prescription drugs, medicines and aids for disabled people; certain supplies by and to charities; women's sanitary products; and the installation of energy-saving materials. Each is a defined group with its own conditions, so the right move on a specific supply is always to find the group and read the conditions, not to reason by analogy from a similar-sounding product.

Why zero-rated sellers register voluntarily

Here is the commercial point that most small businesses miss, and it is worth more than the classification detail above.

The ordinary instinct of an unregistered business is to stay under the £90,000 registration threshold. That instinct is right when your sales are standard-rated and your customers are consumers, because registration means adding 20% to your prices or absorbing it out of your margin. It is exactly backwards when your output is zero-rated.

A zero-rated seller makes taxable supplies at 0%. Output VAT is nil. Input VAT on stock, materials, equipment, vehicles, premises costs and professional fees is recoverable in full. Every VAT return therefore produces a repayment. Registration costs the business nothing on the sales side, because there is no VAT to add to the price, and hands back real cash on the cost side.

Two consequences follow. First, a zero-rated business below the threshold should usually register voluntarily rather than wait, because every quarter it stays unregistered is a quarter of input tax it will never get back. Second, zero-rated turnover counts toward the £90,000 threshold anyway, so the obligation arrives sooner than a business owner watching only their standard-rated sales expects. The threshold is a floor to cross, not a ceiling to duck under. That narrow question has its own page: when to register for VAT if you sell zero-rated goods, and the threshold mechanics are on the VAT threshold.

The statute recognises the mirror case. VATA 1994 Schedule 1 paragraph 14(1) allows HMRC, on request and at their discretion, to exempt from registration a person whose supplies are zero-rated. It is a request HMRC may grant, not an entitlement, and it comes with the obvious trade-off: exemption from registration also means no input-tax recovery. A business that is genuinely in a repayment position rarely wants it.

Is insurance VAT exempt or zero-rated?

Insurance is exempt. It is not zero-rated. It sits in VATA 1994 Schedule 9 Group 2, where item 1 exempts insurance and reinsurance transactions, and item 4 exempts insurance related services supplied by insurance brokers and insurance agents acting in an intermediary capacity.

The confusion is understandable, because a premium arrives with no VAT on it and the reflex is to assume that means zero-rated. It does not. The consequences of exemption are the ones that actually bite.

• There is no input VAT on a premium for you to reclaim. A business paying for its own commercial cover has nothing to put on a VAT return, because no VAT was charged in the first place. Attempting to extract a notional 20% out of a premium is a straightforward error and one HMRC finds easily.
• Premiums carry Insurance Premium Tax instead. IPT is a separate tax charged under Finance Act 1994 Part III. HMRC's own guidance describes VAT and IPT as "2 very different taxes", and the critical point for a business is that IPT is not recoverable the way input VAT is. It is a cost, not a reclaim. The rates and the higher-rate categories are on Insurance Premium Tax.
• Brokers and agents cannot recover attributable input tax. An intermediary whose income is exempt commission absorbs the VAT on its software, office and professional costs. A broker with any standard-rated income alongside it is into partial exemption, which the VAT exemption page covers in full.
• Not everything an insurance business sells is exempt. Market research, advertising and promotional work, standalone valuation and inspection services, and manufacturer or retailer warranties that are unlikely to constitute insurance at all all fall outside the exemption. So does the tradesperson's repair work paid for by an insurer to settle a claim: the plumber charges VAT in the ordinary way. HMRC sets the boundary out in VAT Notice 701/36.

So the short answer to the question as people ask it: insurance is VAT exempt, not zero-rated, and the practical difference is that there is no VAT on the premium to recover and there is IPT on it instead.

Four different things, not two

Bookkeeping systems usually offer a "no VAT" code, and that single code is where most of the trouble starts. There are four distinct treatments and they behave differently.

Treatment	VAT on the invoice	Input tax on costs	Counts toward £90,000?
Standard rate	20%	Recoverable	Yes
Reduced rate	5%	Recoverable	Yes
Zero rate	0%	Recoverable	Yes
Exempt	None	Blocked	No
Outside the scope	None	Blocked	No

The reduced rate is 5%, and it is a real rate: VAT is charged, shown on the invoice and paid over. It is not a variety of zero rate, and a customer receiving a 5% invoice is paying VAT. Both are taxable rates, so recovery is preserved either way, but they are separate categories with separate conditions. The current list of reduced-rate categories is published on GOV.UK and should be checked there rather than from memory.

The line that matters most is the one between the top three rows and the bottom two. Everything above the line is a taxable supply and preserves recovery. Everything below it is not and does not.

Most real businesses sit on more than one row, and that is where the coding decision stops being academic. A bookshop that sells paperbacks (zero-rated), greetings cards and stationery (standard-rated) and a rented meeting room upstairs (potentially exempt) is running three treatments through one till. If all three are posted to a single "no VAT" or "0%" code, the VAT return understates output tax on the cards, overstates the recoverable input tax attributable to the room, and reports a taxable turnover figure that no longer matches the registration test. None of that is a difficult calculation once the supplies are coded correctly, and all of it is difficult to unpick afterwards. The time to get the classification right is when the product or service is first set up in the system, not when HMRC asks about it.

Worked examples: the same zero, the opposite cash result

A print shop turning over £140,000

A print shop's work is almost entirely leaflets and brochures, which fall inside Schedule 8 Group 3 item 1. Its output VAT is nil on effectively every invoice it raises. Its costs are not: paper, ink, plates, a maintenance contract, rent on the unit and, this year, a replacement press all arrive with 20% VAT on them.

Because leaflets are zero-rated rather than exempt, every pound of that input VAT is recoverable. The output side of each return is nil and the input side is not, so the return nets to a repayment from HMRC. Registration did not raise a single price the shop charges, because there was no VAT to add. It simply converted a block of previously sunk VAT into recoverable input tax, and the press in particular delivers a substantial one-off reclaim in the quarter it is bought. The business is better off registered, and it was worse off in every quarter it spent below the threshold unregistered.

The one thing the shop has to watch is the boundary inside its own product range. The leaflets are zero-rated; the letterheads, compliment slips and business cards it prints alongside them are standard-rated. Getting that split right on the sales side is a separate job from recovering the input tax.

A funeral director turning over £140,000

Take the same turnover in a different trade. A funeral director's core supply, the disposal of the remains of the dead and the making of arrangements for it, is exempt under Schedule 9 Group 8. Output VAT is nil here too, and to a family receiving the invoice the two businesses look identical.

The cash result is the opposite. The VAT on the hearse, on the premises, on the printed order of service stationery and on the firm's professional fees is attributable to exempt supplies, so none of it is recoverable. It stays in the cost base and has to be recovered through pricing instead. There is no repayment, and registration confers no benefit on that part of the business at all.

It gets more involved, not less. A typical funeral package is not wholly exempt: flowers and wreaths, headstones, memorials and plaques, and newspaper announcements are standard-rated. So the director has output VAT on part of the package, no output VAT on the rest, and a partial exemption calculation to run on the input tax in the middle. The print shop, with a single treatment across almost all of its sales, never has that conversation.

Same zero on the invoice. Opposite result on the return, and a materially different amount of administration.

What people get wrong

• Using "zero-rated" and "exempt" as synonyms. They describe opposite mechanisms and produce opposite cash outcomes. The words are used loosely in conversation and the loose usage then ends up in the accounting system, where it causes real misstatement.
• Assuming a zero-rated business should stay unregistered. Usually the reverse is true. A wholly zero-rated business is in a repayment position, so staying below the threshold costs it money every quarter.
• Assuming insurance is zero-rated because there is no VAT on the premium. It is exempt, there is no input VAT to recover, and IPT applies instead.
• Treating the 5% reduced rate as a kind of zero rate. It is a positive rate. Real VAT is charged and the customer pays it.
• Assuming everything printed is zero-rated. Reading matter is; stationery is not. A printer running both through one nominal code will misstate both sides.
• Forgetting that zero-rated turnover counts toward the threshold. A wholly zero-rated business still has to monitor the rolling 12-month test and still has to register on crossing £90,000.
• Applying an age test to children's clothing. The test is the size of the garment, not the age of the person buying it.
• Zero-rating something that should be standard-rated. The VAT is still due. HMRC assesses the seller for the output tax that should have been charged, which comes out of margin if the customer was never invoiced for it, and interest and a penalty can follow. Correcting a misclassification early is always cheaper than defending it.

Where to go next

• VAT exemption, the Schedule 9 groups, the recovery block and the partial exemption de minimis limit.
• When to register for VAT if you sell zero-rated goods, the narrow registration question for a wholly zero-rated seller.
• The VAT threshold, the £90,000 rolling test and the £88,000 deregistration figure.
• Insurance Premium Tax, the rates that apply to premiums instead of VAT.
• VAT on printing, where the reading-matter line falls across a printer's product range.
• VAT on transport, the 10-passenger rule in practice.
• How to complete and submit a VAT return, including where zero-rated and exempt turnover go on the form.
• Flat rate VAT against standard VAT, and why the flat rate scheme rarely suits a zero-rated business.