Is zero-rated the same as exempt for VAT?

No. A zero-rated supply is still a taxable supply charged at 0% — the supplier can reclaim input VAT and the turnover counts toward the £90,000 registration threshold. An exempt supply is not taxable at any rate — the supplier normally cannot reclaim input VAT and the turnover does not count toward the threshold.

Can an exempt business reclaim VAT on its costs?

Normally no. Input VAT relating to exempt supplies is blocked and becomes a cost of the business. The main exceptions are limited cases such as exempt supplies of certain financial services made to customers outside the UK. Partly exempt businesses may reclaim under the de minimis rules.

Does zero-rated turnover count toward the VAT registration threshold?

Yes. Because zero-rated supplies are taxable supplies, their value counts toward the £90,000 threshold exactly like standard-rated turnover. A business with £95,000 of zero-rated sales must register for VAT.

Can a business that only makes exempt supplies register for VAT?

No. A business making only exempt supplies has no taxable turnover, so it cannot register for VAT — and it does not need to. It can only register if it also makes taxable supplies (including zero-rated ones).

Zero Rated vs Exempt VAT UK: What's the Difference?

Q: What is the de minimis rule for partly exempt businesses?

Under VAT Notice 706, a partly exempt business is treated as fully taxable (reclaiming all input VAT) if its exempt input VAT averages £625 or less per month (£7,500 per year) and is no more than 50% of its total input tax. Otherwise it must apportion input VAT and make an annual adjustment.

If you sell goods or services in the UK that carry no VAT, you need to know exactly why they carry no VAT — because the reason changes everything about your business. In UK VAT law, "£0 VAT on the bill" can mean two completely different things: zero-rated or exempt. To the customer, they look identical. Behind the till, they are almost opposites.

This is the single most-misunderstood distinction in UK VAT, and getting it wrong is expensive.

2026/27 context: the standard UK VAT rate is 20%, with 5% and 0% rates for specific supplies, and the VAT registration threshold is £90,000 of taxable turnover.

Zero-rated VAT: still taxable, just at 0%

Zero-rated supplies are governed by section 30 of the VAT Act 1994 and Schedule 8. The key point is easy to miss: a zero-rated supply is still a taxable supply — it is just taxed at a rate of 0%. The supply has not escaped the VAT system; it sits inside it at a zero rate.

What zero-rating means in practice

The customer pays £0 VAT. A £10 paperback costs £10, with no VAT added.
The supplier CAN reclaim input VAT on the costs of making the supply. This is the defining feature of zero-rating: because the supply is taxable, the VAT chain stays intact, and input VAT flows back to the business on its VAT return.
Zero-rated turnover COUNTS toward the VAT registration threshold. £95,000 a year of zero-rated book sales breaches the £90,000 threshold just as surely as £95,000 of standard-rated sales.
It is recorded in Box 6 of the VAT return, the box for total value of sales excluding VAT — the same box as standard-rated sales.

Common zero-rated supplies

Zero-rating applies to a list of socially important supplies, including:

Most food for human consumption (supermarket food, not restaurant meals)
Books, newspapers and printed matter
Children's clothes and shoes
New residential construction — the first sale of a newly built home
Exports of goods from Great Britain
Household water supplies
Aircraft repair and maintenance

A VAT-registered bookshop charging 0% on every sale still files VAT returns, still reclaims the VAT on its rent, shelving, till rolls and electricity, and still counts its takings toward the registration threshold. The 0% rate costs the shop nothing — the VAT system works normally around it.

Exempt VAT: no VAT at any rate

Exempt supplies are governed by Schedule 9 of the VAT Act 1994. An exempt supply is not taxable at any rate — it sits outside the VAT system entirely. This sounds like an even better deal than zero-rating, but for the business it is usually worse.

What exemption means in practice

The customer pays £0 VAT. As with zero-rating, nothing is added to the bill.
The supplier CANNOT normally reclaim input VAT on the costs of making the supply. The VAT on the business's purchases becomes a real, unrecoverable cost — it simply inflates the cost base. (There are limited exceptions, such as supplies made to customers outside the UK, but the default is: blocked.)
Exempt turnover does NOT count toward the registration threshold. £100,000 a year of exempt insurance premiums keeps the business below the £90,000 threshold — in fact, it has zero taxable turnover.
A business making ONLY exempt supplies cannot register for VAT — and does not need to. Without any taxable supplies, there is nothing for VAT registration to attach to.

Common exempt supplies

Exemption applies to another long list, including:

Insurance
Finance and credit (lending, arranging loans)
Education by eligible bodies
Health services — doctors, dentists, opticians
Letting and selling of land and property (mostly — though commercial rent can be "opted to tax" to become standard-rated instead)
Postal services
Betting, gambling and lotteries
Fundraising events by charities
Subscriptions to certain membership organisations

An insurance broker paying 20% VAT on office software, accountancy fees or office rent gets none of it back. That VAT is simply part of the cost of doing business — a permanent, irreducible margin drag that zero-rated businesses never suffer.

The comparison: side by side

The customer sees £0 VAT either way. Everything else differs:

	Zero-rated	Exempt
Legal basis	VATA 1994 s.30, Schedule 8	VATA 1994 Schedule 9
Is it a taxable supply?	Yes — taxed at 0%	No — outside the tax
VAT charged to customer	£0	£0
Can the supplier reclaim input VAT?	Yes	No (normally)
Counts toward the £90,000 threshold?	Yes	No
VAT return reporting	Box 6 (total sales)	Exempt supplies disclosed separately
Business can be VAT registered?	Yes	Only if it also makes taxable supplies

The rule of thumb: zero-rated keeps you inside the VAT system at a 0% rate, with all the benefits of being taxable; exempt puts you outside the system, and the door to input VAT recovery closes behind you.

Why this distinction actually matters

For most businesses the distinction shows up in two places: registration and cost.

Registration

Because zero-rated turnover counts toward the threshold, a fast-growing zero-rated business can be dragged into mandatory VAT registration on the strength of sales that charge no VAT at all. A food retailer turning over £95,000 a year must register — even though its customers never pay a penny of VAT. An exempt business with the same turnover registers for nothing, because none of its turnover is taxable.

Cost

The input VAT position is where real money is lost. Two businesses each spend £12,000 plus VAT on equipment. The zero-rated one reclaims £2,400; the exempt one absorbs it. Over a year of fit-outs, software subscriptions and professional fees, the gap compounds into thousands of pounds of unrecoverable cost.

Worked £ examples

Example 1: the zero-rated bookshop reclaims everything

A VAT-registered bookshop (all its sales are zero-rated books) spends £12,000 plus VAT on new shelving and till systems.

VAT on the bill: £12,000 × 20% = £2,400
Total paid to the supplier: £14,400
Input VAT reclaimed on the VAT return: £2,400
Net cost to the bookshop: £12,000

Because its sales are taxable (at 0%), the VAT chain is unbroken and the £2,400 comes back. The 0% rate costs the business nothing.

Example 2: the exempt insurance broker absorbs the VAT

An insurance broker (exempt supplies only) spends the same £12,000 plus VAT on new office software.

VAT on the bill: £12,000 × 20% = £2,400
Input VAT reclaimable: £0 — blocked, because the supply it relates to is exempt
Net cost to the broker: £14,400

Identical spend, £2,400 worse off. For exempt businesses, VAT on costs is simply a cost — which is why exempt businesses bargain harder on gross prices and factor VAT into every purchasing decision.

Example 3: the partly-exempt firm under the de minimis limit

A small property firm makes both taxable supplies (opted commercial lets) and exempt supplies (residential lets). Its average exempt input VAT is £400 per month.

The de minimis limit is £625 per month on average (£7,500 per year), plus the 50% of total input tax test.
£400 is under £625, so the firm is treated as fully taxable and reclaims all of its input VAT — no apportionment, no annual adjustment.

Partly exempt businesses: when you make both

Many businesses do not sit cleanly in one camp. A landlord with both opted (taxable) and residential (exempt) lets, or a training company with both commercial courses (taxable) and eligible-body education (exempt), is partly exempt. Such businesses must attribute their input VAT:

Input VAT relating solely to taxable supplies: reclaimable.
Input VAT relating solely to exempt supplies: blocked.
Input VAT relating to both (overheads like rent and accountancy): apportioned, usually by a turnover-based method.

The de minimis rule (VAT Notice 706) is the small-business lifeline: if exempt input VAT averages £625 or less per month (£7,500 per year) and is no more than 50% of total input tax, the business is treated as fully taxable and reclaims everything. Businesses that miss the de minimis limit must perform the full calculation and make an annual adjustment — a year-end true-up comparing the provisional monthly recovery with the actual annual position, with any shortfall repaid to HMRC.

Common mix-ups to avoid

"No VAT charged" is not a VAT status. When a supplier invoices with no VAT, ask whether the supply is zero-rated, exempt or outside the scope entirely — the answer determines your own reclaim position.
Exports are zero-rated, not exempt. An exporter charges 0% and reclaims all input VAT — which is exactly why exporting businesses are often in a VAT repayment position.
Commercial rent is exempt by default, but a landlord can opt to tax and make it standard-rated — the one common case where a business can voluntarily move a supply from exempt to taxable to unlock input VAT recovery.

Conclusion

Zero-rated and exempt both put £0 VAT on the customer's bill, but that is where the similarity ends. Zero-rated supplies stay inside the VAT system at a 0% rate: the supplier reclaims input VAT and the turnover counts toward the £90,000 registration threshold. Exempt supplies sit outside the system: the supplier's input VAT is blocked and the turnover counts for nothing toward registration.

For any business with VAT-bearing costs, the question is never "do I charge VAT?" — it is "which side of the line am I on?" Know the answer before you price, before you register, and before you sign any lease, and the £2,400s will land in the right column.

Zero Rated vs Exempt VAT UK: What’s the Difference?