What Are VAT Rates in the UK?

In the UK, there are four main VAT rates applied to different goods and services:

• Standard rate (20%) – the default rate for most sales

• Reduced rate (5%) – applies to specific goods like home energy

• Zero-rated (0%) – items taxed at 0%, such as children’s clothing

• Exempt – items that are completely exempt from VAT

Understanding these categories is essential for identifying whether your sales are subject to VAT, zero rated, or exempt, and whether you can reclaim the VAT paid on business expenses.

What does VAT exemption mean?

VAT exemption means that certain goods and services are exempt from VAT entirely. If your business provides VAT exempt items like education, healthcare, or certain financial services you won’t charge VAT on sales. However, the trade-off is that you also can’t reclaim the VAT incurred on related expenses. This can impact your profit margins and cash flow. Businesses dealing in exempt goods and services should carefully track their costs and understand how partial exemption rules might apply.

Standard-rated supplies

The standard rate of VAT in the UK is 20% and applies to the majority of goods and services sold by VAT-registered businesses. These are known as standard-rated supplies, and they include items like electronics, home goods, and professional services. Businesses that supply these must charge VAT on sales and can usually reclaim the VAT incurred on their expenses. Keeping clear records of these transactions is essential for accurate VAT returns and ensuring full compliance with HMRC regulations.

Zero-rated supplies

Zero-rated supplies are goods and services that are taxable, but at a rate of 0%. This means you don’t charge VAT to customers, but you can still reclaim the VAT incurred on related business expenses. Common examples include most food items, children’s clothing, and printed books. Supplying zero rated VAT items allows businesses to maintain competitive pricing while recovering input VAT, making it an important classification for importers and retailers in the UK.

Items That Are Zero Rated for VAT in the UK

In the UK, a range of items are zero rated for VAT, meaning they are taxed at 0% but still count as taxable supplies. This allows businesses to reclaim the VAT incurred on related expenses. Common zero rated items for VAT include basic food like bread and milk, children’s clothing, books and printed newspapers, and public transport fares. Understanding which zero rated VAT items apply to your business is essential for submitting accurate VAT returns and maintaining HMRC compliance.

Implications for businesses

Knowing whether your goods or services are standard-rated, zero-rated, or exempt from VAT directly affects your pricing, accounting, and profit margins. For example, if you’re selling VAT exempt items, you won’t be able to reclaim VAT incurred on related expenses — potentially increasing costs. On the other hand, supplying zero rated VAT items still allows you to recover input tax. Businesses dealing in a mix of categories may face partial exemption, requiring careful VAT calculations to stay compliant.

Do I Need to Apply for VAT Exemption or Zero-Rating?

You don’t typically apply for VAT exemption or zero-rating — these are determined by the type of goods or services you provide. If your business only deals in VAT exempt items, like healthcare or financial services, you won’t need to charge VAT, and you generally won’t be able to reclaim VAT incurred. However, if you supply zero rated VAT items, such as children’s clothes or food, you can still register for VAT and reclaim input tax. It’s all about correct classification, not formal application.

Navigating VAT doesn’t have to be difficult

Managing VAT exempt items, zero rated supplies, and standard-rated goods may seem complex — but with the right support, it doesn’t have to be. At Mercium UK, we help businesses accurately classify their products, reduce VAT errors, and simplify their VAT returns. Whether you’re unsure how to handle partial exemption, or need help reclaiming VAT incurred on imports, our team can guide you every step of the way. From classification to customs clearance, we make VAT compliance easier.

Conclusion

Understanding the difference between VAT exempt items, zero rated VAT supplies, and standard-rated goods is vital for staying compliant and financially efficient. While zero rated items for VAT still allow businesses to reclaim VAT incurred, exempt goods and services do not. Classifying your supplies correctly can impact your VAT returns, pricing, and profit margins. Whether you’re importing goods, offering services, or selling mixed supplies, VAT accuracy matters. At Mercium UK, we help simplify your VAT obligations, so you can focus on growing your business.