Difference Between Exempt and Zero Rated (VAT)

Exempt vs Zero Rated (VAT)
 

VAT is the value added tax that is charged when selling goods and services. The price of these goods and services include the VAT amount. There are different types of VAT rates that apply to different types of goods and services. There are also certain goods and services on which a VAT cannot be charged. Retailers of goods and services need to know which tax rates apply for different goods and services so that the right amount of tax can be charged and reclaimed. The article offers a clear explanation on the different types of goods and services, the tax rates that apply, and show the main similarities and differences between zero rated goods and exempt goods.

Zero Rated

Zero-rated goods are products for which value added tax (VAT) is not imposed. Zero rated goods may include certain food items, goods sold by charities, equipment such as wheelchairs for the disabled, medicine, water, books, children’s clothing, etc. In the UK, the normal VAT on goods are 17.5%, but since VAT is a hidden tax there is no way to identify whether a good is zero rated or not. The retailers who sell zero rates goods can recover the VAT on the costs that they incurred on any purchases that are directly related to the sales of zero rated goods. When the retailer fills out the VAT returns they can claim the input tax credits to recover the VAT that they paid or owe to the business.

Exempt

Exempt goods are also goods that do not have VAT. Since exempt goods do not charge VAT, a supplier who supplies exempt goods cannot claim back the VAT on the purchases related to exempt goods. Examples of exempt goods include insurance, certain types of training and education, certain services offered by doctors and dentists, postal services, betting, lotteries, physical education, works of art, cultural services, etc. In the event that the retailer supplies only exempt goods or services they cannot register for VAT or charge VAT, which means there is no VAT to be claimed back. If the retailers sell some exempt goods and some taxable goods, they will be known as ‘partly exempt’; in which case, the retailer can claim the VAT on the taxable goods and services sold.

What is the difference Zero Rated and Exempt?

Zero rates goods and exempt goods are similar to one another in that they both do not charge VAT on the goods and services sold. While zero rated goods include items such as books, goods sold by charities, equipment such as wheelchairs for the disabled, medicine and water, exempt goods include items such as insurance, certain types of training and education, certain services offered by doctors and dentists, postal services, betting, lotteries, physical education, works of art, etc. The main difference between the two is not from the perspective of the buyer; it is rather from the seller’s perspective. Retailers that sell zero rated goods can reclaim VAT on any purchases that are directly related to the sale of zero rates goods. One the other hand retailers of exempt goods cannot claim back the VAT on the purchases related to exempt goods.

Summary:

Zero Rated vs Exempt

• VAT is the value added tax that is charged when selling goods and services. The price of these goods and services include the VAT amount. There are different types of VAT rates that apply to different types of goods and services.

• Zero rates goods and exempt goods are similar to one another in that they both do not charge VAT on the goods and services sold.

• Retailers that sell zero rates goods can reclaim VAT on any purchases that are directly related to the sale of zero rates goods. On the other hand, retailers of exempt goods cannot claim back the VAT on the purchases related to exempt goods.