Comparison Guide · 2026-07-10

Zero-Rated vs Exempt VAT Supplies UK 2026/27

From a customer's point of view, zero-rated and VAT-exempt goods and services look identical — no VAT appears on the invoice either way. But for the business making the supply, the two are very different: zero-rated supplies remain within the VAT system at a 0% rate, letting the business reclaim VAT paid on its costs, while exempt supplies sit outside the VAT system entirely, generally blocking input VAT recovery. This single distinction affects registration thresholds, pricing, and whether VAT paid on business costs becomes a real, unrecoverable expense.

Last updated: 10 July 2026Last reviewed: 10 July 2026How we verify

At a Glance

Feature	Zero-Rated	Exempt
VAT charged to customer	0%	None — outside the VAT system
Is it a 'taxable supply'?	Yes, taxable at 0%	No — not a taxable supply at all
Can you reclaim input VAT on related costs?	Yes, in full	Generally no (unless partially exempt de minimis limits apply)
Counts toward the £90,000 VAT registration threshold?	Yes	No
Must appear on your VAT return?	Yes, in outputs (box 6)	Yes, but treated separately from taxable turnover
Examples	Most food, children's clothing, books, new-build homes	Insurance, most financial services, health, education, most residential lets
Can status be changed by election?	No	Sometimes — e.g. opting to tax commercial property

Why Zero-Rated Status Is Better for a Business

You can reclaim all input VAT on costs relating to the supply, even though you charge customers nothing
A business making wholly zero-rated supplies often ends up in a repayment position, regularly reclaiming VAT from HMRC
It avoids the complexity of partial exemption calculations that exempt-supply businesses often face

Why Exempt Status Can Be a Hidden Cost

VAT paid on costs relating to exempt supplies generally cannot be reclaimed, so it must be absorbed into your pricing or margins
Businesses making both taxable and exempt supplies face partial exemption calculations, which add compliance complexity
Exempt supplies do not count toward the VAT registration threshold, which limits (rather than helps) your ability to reclaim VAT on related costs even voluntarily in some structures

How HMRC Classifies a Supply as Zero-Rated or Exempt

The classification is set out in VAT legislation on a category-by-category basis, not left to the business to choose. Zero-rating was historically applied to categories Parliament wanted to keep genuinely cheap for consumers — essentials like most food, children's clothing, and printed books and newspapers — while still allowing the businesses that supply them to run efficiently by reclaiming their input VAT. Exemption, by contrast, tends to apply to sectors where VAT is considered inappropriate to the nature of the service, such as insurance and most financial services (which are instead often subject to Insurance Premium Tax or other specific taxes) and areas of significant public policy sensitivity such as health and education.

The practical effect is that a business cannot simply decide its supplies are "zero-rated" for convenience — each type of good or service has to be checked against HMRC's detailed category rules (and in some cases case law) to determine its correct treatment, and getting it wrong can result in under- or over-charged VAT, HMRC assessments, and penalties.

Worked Example: Same Turnover, Different VAT Position

Two businesses each have £200,000 of sales and £40,000 of VAT-inclusive costs (£6,667 of VAT included, at 20%).

Business A sells zero-rated children's clothing. It charges its customers £0 VAT on £200,000 of sales, but because these are still taxable supplies, it can reclaim the full £6,667 of input VAT on its costs — receiving a £6,667 VAT repayment from HMRC for the period.

Business B provides exempt private tuition. It also charges its customers £0 VAT on £200,000 of sales, but because tuition is an exempt supply, it cannot reclaim any of the £6,667 of input VAT on its costs — that amount becomes a real, absorbed cost of running the business, reducing its effective margin by £6,667 compared with Business A, despite both businesses charging customers exactly the same headline price.

Frequently Asked Questions

What is the basic difference between zero-rated and exempt for VAT?

Both mean no VAT is charged to the customer, but zero-rated supplies are still technically taxable supplies (at 0%), which means a business can reclaim the VAT it pays on related costs (input VAT). Exempt supplies are not taxable supplies at all, so a business generally cannot reclaim the VAT on costs related to making them.

What are examples of zero-rated supplies?

Most food and drink for human consumption (with exceptions like confectionery, crisps and some takeaway hot food), children's clothing and footwear, books, newspapers and most printed matter, and new-build residential construction are common examples of zero-rated supplies in the UK.

What are examples of exempt supplies?

Insurance, most financial services, health services provided by registered practitioners, education provided by eligible bodies, and the majority of residential property lettings are common examples of VAT-exempt supplies.

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Why does the input VAT reclaim difference matter so much?

A business making only zero-rated supplies can still reclaim all its input VAT, meaning it typically receives regular VAT repayments from HMRC. A business making only exempt supplies cannot reclaim input VAT relating to those supplies at all, so VAT on its costs becomes an irrecoverable cost that must be absorbed into pricing.

Does making exempt supplies affect whether I need to register for VAT?

Yes. Exempt supplies do not count toward the £90,000 VAT registration threshold for 2026/27, so a business making only exempt supplies generally cannot (and does not need to) register for VAT at all. Zero-rated supplies do count toward the threshold, even though no VAT is charged on them.

What happens if I make both taxable and exempt supplies?

You become 'partially exempt', and must apportion your input VAT between the part relating to taxable supplies (recoverable) and the part relating to exempt supplies (generally not recoverable), using a standard method or an agreed special method — this can be one of the more complex areas of VAT compliance.

Can a business choose to make an exempt supply taxable instead?

In some cases, yes — commercial property and land are the main example, where a business can 'opt to tax' certain supplies that would otherwise be exempt, converting them to standard-rated (20%) supplies so that related input VAT becomes recoverable. This is a formal election with its own rules and consequences.

Is zero-rated VAT the same as 'VAT-free'?

Not quite — it means VAT is charged, but at a rate of 0%, so the customer pays no VAT, but the transaction is still formally within the VAT system. This distinction is what allows the supplying business to reclaim its input VAT, unlike a supply that is genuinely outside the scope of VAT entirely.

Do I need to show zero-rated sales on my VAT return?

Yes. Zero-rated sales must be included in your VAT return (in box 6, outputs) even though the VAT charged is £0, and they count toward your taxable turnover for registration purposes, unlike exempt sales.

Which is generally better for a business — making zero-rated or exempt supplies?

Zero-rated status is usually more favourable for a business, because it allows full input VAT recovery while still charging customers no VAT. Exempt status looks similar to the customer (no VAT charged) but is worse for the business, because VAT paid on costs relating to those exempt supplies typically cannot be reclaimed and becomes a real cost.

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About the author

James Morgan

Property & Mortgage Writer

James Morgan has been writing about UK property and mortgages since 2016. He covers the full purchase journey — affordability checks, mortgage product comparison, the deposit and loan-to-value puzzle, stamp duty (SDLT in England and Northern Ireland, LBTT in Scotland, LTT in Wales), first-time buyer reliefs, conveyancing costs, and what to expect at completion. James also writes on the landlord side: buy-to-let mortgages, the 3% additional-property SDLT surcharge, Section 24 finance-cost restriction, rental yield maths, and the practical realities of being a small private landlord in the post-2017 tax regime. He has a particular interest in the remortgage decision — when to switch product, the trade-off between rate and arrangement fee, early repayment charges, and how to read a mortgage offer document. James's mortgage worked examples are built up from the underlying amortisation schedule, not borrowed from comparison sites, and stamp-duty figures are verified band-by-band against the HMRC SDLT calculator. He writes to CalcHub's editorial standards, with primary-source citations to HMRC, Revenue Scotland and the Welsh Revenue Authority, and clear disclosure that CalcHub does not sell mortgages or take affiliate commission on regulated mortgage products.

Property journalist since 2016
UK mortgage and stamp-duty specialism (SDLT, LBTT, LTT)
Writes to CalcHub editorial standards (primary-source citation, annual review)

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Disclaimer: This comparison is general information, not personal financial advice. Figures reflect the 2026/27 UK tax year and can change. VAT liability rules for specific goods and services are detailed and category-specific — always check current HMRC/gov.uk guidance or speak to a VAT specialist before making a decision.