Zero-Rated vs Exempt VAT: The Crucial Difference Every Business Owner Must Know

Jun 11, 2025

Zero-Rated vs Exempt VAT Explained: What It Means for Your Business

Understanding Zero-Rated vs Exempt VAT: A Clear Guide for Businesses

For many UK business owners, the terms “zero-rated” and “exempt” VAT seem interchangeable. After all, in both cases you don’t charge VAT to your customers. But in reality, there is a crucial difference that can affect your tax position, your ability to reclaim VAT, and even whether you need to register for VAT in the first place.

In this article, we break down the difference in plain English and explain what it means for your business.

What Does “Zero-Rated” VAT Mean?

Zero-rated supplies are goods or services that are taxable for VAT purposes but taxed at a rate of 0%.

Examples include:

Most food and children’s clothing
Books, newspapers, and magazines
Some transport services

Key Points:

You charge 0% VAT to your customers (so they pay no VAT).
Because your supplies are still “taxable,” you remain inside the VAT system.
This means you can reclaim input VAT on business expenses related to those zero-rated sales.

👉 Put simply: zero-rated keeps you in the VAT system, just at a 0% rate.

What Does “Exempt” VAT Mean?

Exempt supplies are goods or services that are completely outside the VAT system.

Examples include:

Certain financial services
Some education and training services
Health and medical services provided by registered professionals

Key Points:

You do not charge VAT to your customers.
Exempt supplies are not “taxable,” so you cannot reclaim VAT on expenses directly related to them.
If your business only makes exempt supplies, you cannot register for VAT (unless you also make taxable supplies).

👉 Put simply: exempt supplies take you out of the VAT system.

Zero-Rated vs Exempt VAT: The Key Difference

Although both mean “no VAT charged to customers,” the difference lies in input VAT recovery:

	Zero-Rated Supplies	Exempt Supplies
Charge VAT to customers	No (0%)	No
Count towards VAT registration threshold	Yes	No
Can reclaim input VAT on purchases	Yes	No
Example	Children’s clothing	Private tuition

👉 In short: Zero-rated lets you recover VAT on your costs; exempt does not.

Why It Matters for Businesses

Cashflow Impact: If your services are exempt, you may be stuck paying VAT on expenses without being able to reclaim it.
VAT Registration: Zero-rated sales count towards the £90,000 VAT registration threshold, but exempt sales do not.
Mixed Supplies: Many businesses provide both taxable (including zero-rated) and exempt services. This creates a “partial exemption” situation, where only some input VAT can be recovered.

How Wexley & Associates Helps

At Wexley & Associates, we:

Review your business model to determine which VAT category applies.
Advise on reclaim opportunities and prevent lost VAT recovery.
Handle VAT registrations, exemptions, and partial exemption calculations for peace of mind.

VAT rules are nuanced — but with the right advice, you avoid costly mistakes.