Last updated: 14 October 2026
What is the difference between zero-rated and exempt for VAT?
Both mean the customer pays no VAT, but they affect your business very differently. Zero-rated supplies are taxable at 0%. They count towards the VAT threshold, and you can reclaim VAT on the costs of making them. Exempt supplies are outside the VAT system. They don’t count towards the threshold, and you generally can’t reclaim the VAT on related costs.
Side-by-side comparison
| Feature | Zero-rated (0%) | Exempt |
| VAT charged to customer | None | None |
| Counts towards the £90,000 threshold | Yes | No |
| Can reclaim input VAT | Yes | No (subject to partial exemption) |
| Shown on VAT return | Box 6 (sales) | Box 6 (sales) |
| Examples | Most food, children’s clothes, books, newspapers, public transport, new homes | Insurance, finance, residential rent, most education and healthcare, postal services |
Why it matters
A zero-rated business
A bakery selling bread is zero-rated. If it registers, it can reclaim VAT on ovens, packaging and fuel, and it often gets repayments from HMRC.
An exempt business
An insurance broker making exempt supplies can’t register for VAT just for those sales, and can’t reclaim VAT on rent, IT or advertising. VAT is a real cost to the business.
A mixed business
A business making both taxable and exempt supplies is “partially exempt”. It can only reclaim VAT related to taxable supplies, plus a share of overhead VAT. If exempt input VAT is small (the de minimis limits), you may still be able to reclaim it all.
Outside the scope
Some transactions are outside the scope of VAT altogether, such as wages, dividends, donations, MOT fees and statutory fees. They aren’t zero-rated or exempt, and they don’t go on the VAT return in most cases.
Example
A dental practice providing NHS and private treatments makes exempt supplies, so VAT on its equipment is a cost. If it also sells toothbrushes and whitening products (standard-rated), it may need to register if those sales exceed £90,000, and use partial exemption.
Option to tax for property
Commercial property rent and sales are exempt by default, but landlords can “opt to tax” and charge VAT. That allows them to reclaim VAT on the building’s costs.
Choosing the right VAT rate
Many businesses apply the wrong rate because similar products have different rates: a plain biscuit is zero-rated, but a chocolate-covered biscuit is standard-rated. Check HMRC’s VAT notices for your sector, and if you’re unsure, ask HMRC for a non-statutory clearance before you start charging. Keep the evidence behind your decision.
Zero rate vs exempt
Zero-rated sales are still taxable, so you can reclaim the VAT on related costs. Exempt sales, such as most insurance and some property, don’t allow you to reclaim the VAT on costs.
Frequently asked questions
Can a business with only zero-rated sales avoid registering?
It can apply for an exemption from registration, but it would lose its VAT repayments.
Is residential rent exempt?
Yes, so landlords can’t charge VAT or reclaim it on residential lets.
Is exempt the same as “no VAT”?
For the customer, yes. For your input VAT, no.
Are children’s clothes zero-rated?
Yes, for clothing designed for young children.
Related: VAT on bakery items and how to calculate VAT.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with VAT rates and liability. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
