What is the difference between zero-rated and VAT exempt?
Answered 11 March 2026
Zero-Rated vs VAT Exempt: Key Differences
These are two distinct VAT categories that both result in no VAT being charged to the customer, but they differ fundamentally in their legal character and practical consequences for the supplier.
What the law says
Zero-rated supplies are defined under VATA 1994, s.30(1)-(2). Where a taxable person makes a zero-rated supply:
- (a) no VAT shall be charged on the supply; but
- (b) it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil.
A supply is zero-rated if the goods or services are of a description specified in Schedule 8 to VATA 1994.
Exempt supplies are defined under VATA 1994, s.31(1). A supply is exempt if it is of a description specified in Part 2 of Schedule 9 to VATA 1994.
The critical legal distinction is that zero-rated supplies remain taxable supplies (at a nil rate), whereas exempt supplies are not taxable supplies at all. This has two major downstream consequences under the VAT Regulations 1995:
-
Input tax recovery: No part of the input tax on goods or services used exclusively in making exempt supplies shall be attributed to taxable supplies. By contrast, because zero-rated supplies are taxable supplies, input tax relating to them is fully recoverable.
-
VAT registration: The VAT registration threshold is based on the value of taxable supplies. Since exempt supplies are not taxable supplies, a business making only exempt supplies cannot be required to register (and cannot voluntarily register solely on the basis of exempt supplies).
HMRC guidance / practice
HMRC summarises the practical differences as follows:
| Zero-Rated | Exempt | |
|---|---|---|
| VAT charged to customer | No (0%) | No |
| Treated as a taxable supply? | Yes | No |
| Input tax on related costs recoverable? | Yes | No (subject to de minimis rules) |
| Can supplier register for VAT? | Yes | Generally No |
On zero-rating, HMRC confirms it is "the rate of VAT (0%), liable on supplies of certain goods and services, for example, food and children's clothes… any input tax incurred by a charity in the making of zero-rated supplies is recoverable. Unlike exempt activities, charities (and any other business), whose business activities are wholly zero-rated, are able to register for VAT."
On exempt supplies, HMRC's partial exemption guidance confirms that "VAT incurred in making exempt supplies is non-recoverable" and that a business registered for VAT that incurs input tax relating to exempt supplies is partly exempt, meaning it may not be able to claim all the input tax it incurs and will normally have to use a partial exemption method.
On input tax and taxable supplies generally, HMRC confirms: "you can reclaim from HMRC as much of the VAT on your purchases and imports, as relates to the standard-rated, reduced-rated and zero-rated supplies you make. In principle, you cannot reclaim VAT which is for any non-business activity or to any exempt supplies you make."
Summary in plain terms
Zero-rated = VAT is charged at 0% — the supply is still "taxable", so the supplier can register for VAT and reclaim input tax on related costs.
Exempt = VAT is entirely outside the VAT system — the supply is not taxable, so the supplier generally cannot register for VAT and cannot recover input tax on related costs (subject to de minimis rules).
Citation sources
The following is a list of some terms commonly used in partial exemption, along with a brief explanation of their meaning. It is not a full list. Some terms are complex, and so these explanations should be regarded as general only, and not definitive. If in doubt, contact VAT helpline. Term Explanation Allocation Some special methods have different sectors where the recoverable element of residual input tax is different. Allocation is the means by which residual input tax is distributed to speci
If you make taxable supplies (standard-rated, reduced-rated or zero-rated), you have to account to HMRC for the VAT due. This is your output tax. You’ll normally charge the VAT to your customers. If your customers are registered for VAT and the supplies are for use in their business, the VAT is their input tax. In the same way, VAT charged to you on your business purchases is your input tax. As a registered person, you can reclaim from HMRC as much of the VAT on your purchases and imports, as re
Part II Reliefs, exemptions and repayments Reliefs etc. generally available Exempt supplies .... 31 1 A supply of goods or services is an exempt supply if it is of a description for the time being specified in Part 2 of Schedule 9 and it is not of a description specified in Part 3 of that Schedule .... 2 The Treasury may by order vary that Schedule by adding to or deleting from it any description of supply or by varying any description of supply for the time being specified in it, and the Schedu
This is the rate of VAT (0%), liable on supplies of certain goods and services, for example, food and children’s clothes. For more information on what goods and services are zero-rated see the VAT guide (VAT Notice 700). Although no VAT is charged on these supplies, any input tax incurred by a charity in the making of zero-rated supplies is recoverable. Unlike exempt activities, charities (and any other business), whose business activities are wholly zero-rated, are able to register for VAT.
Part II Reliefs, exemptions and repayments Reliefs etc. generally available Zero-rating. 30 1 Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section— a no VAT shall be charged on the supply; but b it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil. 2 A supply of goods or services is zero-rate