Standard rate, zero rate, and exempt: the key differences
The different VAT rates – explained
Most business services and goods are standard-rated at 20%. But some supplies attract a different rate, and getting this right matters for both your invoices and your VAT return.
Standard rate (20%)
Applies to most goods and services. When in doubt, assume the VAT should be charged at the standard rate. Common examples: professional services, software, most manufactured goods, construction work on existing buildings, restaurant meals.
Zero rate (0%)
Taxable but at 0%. VAT is not charged but the sale still goes into Box 6 of the return. Common examples: most food, books, children's clothing, goods exported outside the UK. Apply the ‘Zero Rated Revenue’ code in Xero.
Exempt
No VAT is charged and the supply does not count towards taxable turnover. Input VAT on costs related to exempt activities cannot be recovered. Common examples: most financial services, residential property rental.
Overseas supplies
Selling goods or services to customers outside the UK, whether in the EU or elsewhere, follows different rules and may fall outside UK VAT or require specific treatment. If you make supplies to overseas customers, please contact us so we can make sure they are handled correctly.
💡 Good to know: Zero-rated is not the same as exempt. Zero-rated supplies count towards the VAT registration threshold. Exempt supplies do not. Zero-rated suppliers can reclaim input VAT on their costs. Exempt businesses generally cannot.
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