Zero-Rated vs Exempt VAT: Key Differences and Invoice Wording

Quick answer: The difference between zero-rated and exempt VAT is that a zero-rated supply is taxable at a 0% rate, while an exempt supply is not taxable at all. Both show no VAT on the invoice, but zero-rated sales count towards VAT registration and let you reclaim VAT on related costs, whereas exempt sales do not count towards registration and generally block that recovery. That difference can cost or save a business real money.

This guide explains how zero rating and exemption work in the UK and EU, gives common examples, shows how to word each on an invoice, and walks through a mixed-rate invoice. For full VAT invoice fields, see our VAT invoice guide. You can set different rates per line in our free invoice generator.

Important: This is general information, not tax advice. Which goods and services are zero-rated or exempt is defined in detail by legislation and official guidance, varies between the UK and each EU member state, and changes over time. Check HMRC, your national tax authority or a qualified VAT adviser for your specific supplies.

Zero-rated vs exempt VAT at a glance

	Zero-rated	Exempt	Outside the scope
Is it a taxable supply?	Yes, at 0%	No	Not a supply for VAT
VAT charged to the customer	None (0%)	None	None
Counts towards UK registration threshold	Yes	No	No
Recover VAT on related costs	Generally yes	Generally no	Depends on the activity
Shown on the VAT return	Yes, as sales	Yes, in total sales (UK)	Often not, or only in limited cases
Invoice wording	"Zero-rated" / 0%	"Exempt" plus reason	"Outside the scope of VAT"

What zero-rated means

A zero-rated supply is within the VAT system: it is a taxable supply, the rate just happens to be 0%. Because it is taxable, the supplier can generally reclaim the VAT it pays on costs that relate to it. A business selling only zero-rated goods can therefore receive regular VAT repayments from the tax authority.

In the UK, common zero-rated supplies include:

• Most food for human consumption (but not catering, hot takeaway food, confectionery and certain other items).
• Books, newspapers and children's picture books, including qualifying e-publications.
• Most children's clothing and footwear.
• Exports of goods outside the UK, subject to evidence requirements.
• Many passenger transport services in vehicles designed for 10 or more passengers.
• Construction of new dwellings, in qualifying circumstances.

In EU law, the language is different. The VAT Directive describes exports and intra-Community supplies of goods as "exempt with the right of deduction", which behaves like UK zero rating. Some member states also apply genuine 0% rates to certain domestic goods, and the 2022 reform of the EU rates rules gave member states more flexibility to apply very low or zero rates to a limited list of items.

What exempt means

An exempt supply sits outside the charge to VAT by law. No VAT is charged, but the price of that freedom is that the supplier generally cannot reclaim the VAT on the costs of making it. In effect, the VAT on inputs becomes a cost of the business.

Common exempt supplies in the UK and across the EU include:

• Insurance and most financial services.
• Education and vocational training provided by eligible bodies.
• Health and medical care by registered practitioners (purely cosmetic treatments are generally not covered).
• Most residential lettings and sales of older residential and commercial property, subject to the UK "option to tax" on commercial property.
• Certain postal services, burial and cremation, and some charitable fundraising events.

A business that makes only exempt supplies cannot normally register for VAT. One that makes both taxable and exempt supplies is "partially exempt" and has to apportion its input VAT, recovering only the part attributable to taxable supplies, subject to de minimis rules.

Why the difference matters: a cost comparison

Consider two UK businesses that each spend £10,000 plus £2,000 VAT on equipment and services in a quarter.

	Business A: zero-rated sales	Business B: exempt sales
VAT paid on costs	£2,000	£2,000
VAT charged on sales	£0	£0
VAT recoverable	£2,000 (repayment)	£0
Real cost of inputs	£10,000	£12,000

Both invoices show no VAT, yet Business B carries an extra £2,000 of cost. This is why classifying a supply correctly is not just a labelling choice.

Registration thresholds

In the UK, the VAT registration threshold has been £90,000 of taxable turnover since 1 April 2024. Zero-rated sales count towards it; exempt sales do not. A business whose taxable supplies are wholly or mainly zero-rated may be able to apply to HMRC for an exception from registration. EU member states set their own thresholds, which vary widely. If you are close to a threshold, check current figures with the tax authority. UK sole traders can find more on registration in how to invoice as a sole trader in the UK.

How to show zero-rated and exempt lines on an invoice

When an invoice mixes rates, subtotal each rate group separately and label every line. Good practice is to:

1. Show the VAT rate on each line: 20%, 5%, 0% or "Exempt".
2. Give a net subtotal for each rate, and the VAT for each rate (£0.00 for zero-rated).
3. Keep exempt lines visibly separate from zero-rated lines, never merged under "0%".
4. For exempt supplies in the EU, reference the exemption: EU invoicing rules require a reference to the relevant Directive or national provision, or another indication that the supply is exempt.
5. For exports, keep the evidence that supports zero rating (such as shipping and customs documents) with your records.

This is the same line-by-line discipline you would apply on any itemized invoice. Our tax calculator is handy for checking the VAT on each rate group.

Worked example: a mixed-rate UK invoice

A VAT-registered UK bookshop supplies a school with books (zero-rated) and stationery (standard-rated at 20%).

Description	Qty	Unit price	Net	VAT rate	VAT
Printed reading books	10	£12.99	£129.90	0%	£0.00
A4 notebooks	20	£4.50	£90.00	20%	£18.00

• Net at 0%: £129.90, VAT £0.00
• Net at 20%: £90.00, VAT £18.00
• Total net: £219.90
• Total VAT: £18.00
• Total payable: £237.90

Had the bookshop simply applied 20% to the full £219.90, it would have charged £43.98 of VAT, overcharging by £25.98. If the same school also bought exempt training from an eligible provider, that would normally appear on the provider's own invoice marked "Exempt", not as a 0% line.

How to check whether a supply is zero-rated or exempt

Classification depends on what exactly you supply, to whom and where, so work through it deliberately rather than by assumption:

1. Describe the supply precisely. "Food" is too broad; "cold sandwiches sold to take away" and "hot pies" can be treated differently.
2. Check official guidance first. In the UK, HMRC publishes VAT notices for sectors such as food, books, clothing, health and education. EU businesses should check national guidance, which implements the Directive locally.
3. Check who you are and who the customer is. Some exemptions only apply to eligible bodies or registered professionals, and some zero rates depend on the customer, such as a charity or an overseas buyer.
4. Check where the supply takes place. Cross-border sales may be zero-rated exports, reverse charged or outside the scope of UK VAT altogether.
5. Record your conclusion. Note the guidance you relied on in the product or client record so every invoice uses the same treatment.

If the guidance is unclear, ask your adviser or the tax authority before you invoice. Correcting a classification across many past invoices is far more expensive than checking once.

Common mistakes

• Treating "exempt" and "zero-rated" as synonyms on invoices and in accounting software.
• Leaving the rate blank instead of stating 0% or "Exempt".
• Assuming food is always zero-rated; catering, hot food and many snacks are standard-rated in the UK.
• Zero rating exports without evidence of the goods leaving the country.
• Confusing zero rating with the reverse charge: under the reverse charge, VAT is due but paid by the customer. See our reverse charge invoice guide.
• Discarding records that support a zero-rated or exempt claim; see how long to keep invoices.

Other VAT systems use the same concepts with local twists. The UAE, for example, distinguishes zero-rated and exempt supplies too; see UAE VAT invoice requirements.

Create your mixed-rate VAT invoice now

Use the UK invoice generator to set a VAT rate on each line and label zero-rated and exempt items clearly. A clean, well-spaced layout such as the Nordic invoice template keeps rate groups readable, and the full invoice templates gallery has more options. Confirm each supply's treatment with your adviser before you send.