What is a zero-rated supply?

Zero-rated supplies are goods and services that hold a very niche spot in the tax system. It’s especially important for remote sellers to understand the definition!

Read on to learn:

• The difference between zero-rated and tax-exempt
• How VAT and GST rules use the term
• Which products fall under this category in the EU, UK, and other countries around the world
• How to comply with zero rate rules on invoices and tax returns

The definition of zero-rated

Zero-rated means exactly what it sounds like: a tax rate of 0%. These goods and services do not have any amount of VAT or GST added to the final retail sale.

(No, they are not exempt from tax. Yes, this is a confusing point of bureaucracy! We’ll cover the difference later on.)

The rate of 0% allows the usual chain of input tax credits to stay in place. So businesses and manufacturers can claim input tax on the purchase, thus deducting it from whatever VAT or GST they owe later.

Understanding how consumption taxes work will help you see how this zero-rated process functions throughout the supply chain.

Examples of zero-rated supplies

A zero-rated supply is typically a good or service that’s a key component of producing some other final product. Indeed, it’s part of the supply chain for that end product. Governments don’t want to overtax items that are essential to further manufacturing.

Similarly, most governments don’t want to overtax items that are considered the bare necessities of life, such as food, water, medicine, and sanitary products. Zero-rating these goods and services means that the final market price is more affordable for end consumers.

Finally, exports are often included, too. In these cases, most goods and services for which you charge and collect VAT or GST at home, are actually zero-rated when exported out of the country. This keeps domestic goods attractive to international buyers.

There are also effects for the producers of the goods, which we’ll explain in a later section!

Common zero-rated goods and services in the EU and UK

Here is a short (and by no means comprehensive!) list of items that are commonly taxed at a rate of 0% in the EU and UK.

• Basic groceries such as milk, bread, and vegetables
• Agricultural products such as grain, raw wool, or dried tobacco leaves
• Most farm livestock
• Most fishery products, particularly fish for human consumption
• Prescription drugs and drug-dispensing services
• Certain medical devices such as hearing aids
• Some publications such as newspapers
• Feminine hygiene products
• Exports

Why are zero-rated supplies important?

Zero-rated supplies might not seem like much at first glance, but they play a crucial role in how VAT systems are designed to balance tax collection with fairness. By applying a 0% VAT rate while still allowing businesses to reclaim input tax, governments can keep the cost of essential goods (like food, medicine, and sanitary products) more affordable for consumers.

This mechanism also prevents tax cascading throughout the supply chain, since producers can recover the VAT they paid on inputs, even if they don’t charge VAT on the sale. Zero-rating is especially important for exports, helping local goods stay competitive by avoiding double taxation across borders. Ultimately, zero-rated supplies are a strategic tool used to support social policy goals, protect consumers, and encourage economic growth.

What is the difference between zero-rated and tax exempt?

According to the Tax Policy Center, the difference comes down to how steps and materials in the supply chain are taxed, and whether businesses can make those deductions when they file their taxes.

For a “zero-rated good,” the government doesn’t tax its sale and allows credits for the tax paid on inputs. In other words, deductions are possible!

If a good or business is “exempt,” the government doesn’t tax the sale of the good, but producers cannot claim an input credit for the VAT or GST they paid to produce it.

Because producers can’t get that money back in a tax break, they might try to get it back in revenue — by raising the retail price of the product. So in these cases, what we call “tax-exempt” might actually just have VAT or GST hidden within the price, what the EU calls “residual VAT”.

Note: There is one more type of transaction that doesn’t have tax applied, those that use the reverse-charge mechanism. But with these sales, which are often B2B, it’s important to know that VAT or GST is eventually paid by the buyer!

Zero-rated EU VAT and Supplies

In the EU, understanding when and how the zero rate applies is crucial for compliance and for optimizing VAT recovery.

For example, there are some things that EU countries must exempt, and some supplies that they may choose to exempt. According to the European Commission:

“Supplies that must be exempt include certain activities in the public interest (such as medical and dental care, social services, education etc.) as well as most financial and insurance services and certain supplies of land and buildings. Exemptions also exist for intra-EU supplies and exports of goods outside the EU.”

If Europe is your main market or your next conquest, check out our complete explanation of how to comply with EU VAT.

Zero rate supply in the UK

In the EU and UK, the countries agree to similar laws but have some leeway to determine their own tax rates, including “special rates” that are below 5%.

In the UK, zero-rating is more widely used. Zero-rated supplies have their own UK VAT code and after Brexit, the UK retained many of its previous VAT structures but gained additional freedom to define tax rates. This approach ensures that essential products remain affordable while allowing businesses to recover VAT on costs incurred along the supply chain.

Zero rate supply in South Africa

In South Africa’s VAT system, there is a provision for a zero-rated supply. The vendor charges VAT at 0% on the value of the product and, in return, gets a credit for the VAT paid on taxable supplies utilised in the making of the zero-rated supplies.

Learn more about South Africa VAT for businesses.

Zero-rated GST

In GST laws, it’s sometimes referred to as “nil-rated supply.” But the concept is the same: there is no tax added to the final sale, and businesses can claim input credits on tax they paid along the way.

If you’re curious about GST rules in specific countries, check out the following guides for businesses:

• Canadian GST for businesses
• Australian GST for businesses
• New Zealand GST for businesses
• Indian GST for businesses

Does the concept of zero-rated supplies exist in sales tax?

While the term “zero-rated” is specific to VAT and GST systems, some sales tax systems, particularly in the United States, have similar outcomes through tax exemptions. Certain essential goods, such as groceries, prescription drugs, or clothing, may be exempt from sales tax depending on the state. These exemptions can mimic the effect of zero-rating by removing tax from the final sale, but unlike in VAT systems, businesses cannot reclaim any tax paid on related purchases. So, although the mechanics differ, both systems aim to ease the tax burden on essential goods for consumers.

Other tax rules for zero-rated supply

Zero rate invoicing

When conducting a sale that qualifies for zero-rated VAT, you must provide your customer with a tax invoice that clearly shows the VAT rate as 0%. Make sure the invoice includes all necessary details, such as your VAT number and the customer’s VAT number, if applicable. Learn more about tax invoices and the requirements.

Include zero-rate supplies in tax returns

Although the VAT rate is 0%, companies must include their zero-rated transactions in their regular VAT returns. This allows tax authorities to monitor these transactions and confirm compliance. Generally, you will report both the input VAT (VAT paid on purchases linked to zero-rated supplies) and the output VAT (VAT charged on zero-rated supplies) in your VAT return.