What is a zero-rated supply? Meaning, examples, vs exempt

Ship an export order and the invoice shows 0% VAT. It looks like nothing is due, and in one sense that is true.

But a zero-rated supply is still taxable. Your business charges nothing on the sale and still claims back the VAT or GST it paid on its costs. Confuse it with an exempt supply and you either lose that refund or claim one you are not entitled to.

What is a zero-rated supply?

Zero-rating is a rate, not an absence of tax. You will also see it written as zero rated supply, without the hyphen, and the meaning is the same.

The sale is taxable, the rate applied to it happens to be nothing, and every other rule for taxable sales still applies. HMRC's VAT guide (Notice 700) says zero-rated supplies "are treated as taxable supplies in all other respects". That includes the right to recover the VAT on your own business costs.

That has four practical consequences:

• No output tax. The customer pays no VAT or GST on the sale.
• Input tax stays recoverable. You reclaim the VAT or GST on purchases used to make the sale.
• The sale counts as taxable turnover. In the UK, taxable turnover is everything you sell that is not exempt or out of scope, so these sales count toward the registration threshold.
• It still gets reported. The sale goes on your VAT or GST return like any other taxable sale.

Governments zero-rate for two main reasons. The first is exports. HMRC's export notice explains that exported goods are consumed outside the UK, so taxing them "would be contrary to the purpose of the tax". The second is essentials such as basic food, which some countries zero-rate to keep them cheaper without leaving VAT hidden in the price.

How zero-rating works: a worked example

The difference between zero-rated and exempt only shows up when you follow the input tax. Take a seller in a VAT system with a 20% standard rate:

• Costs: £10,000 of stock and services, plus £2,000 of VAT
• Sale price: £30,000 before tax

Here is the same sale under each treatment:

Treatment	VAT charged on the sale	Input VAT reclaimed	Net position on the return	Input VAT left as a cost
Standard-rated (20%)	£6,000	£2,000	Pays £4,000	£0
Zero-rated (0%)	£0	£2,000	Gets £2,000 back	£0
Exempt	£0	£0	Nothing to pay or reclaim	£2,000

Standard-rated, the seller charges £6,000 of VAT and deducts the £2,000 they paid. The customer funds the VAT.

At 0%, the seller charges nothing but still deducts the £2,000, so the return ends in a repayment.

Exempt, the seller also charges nothing, but cannot deduct the £2,000. It becomes a cost, which they either absorb or pass on in a higher price.

That gap is why the European Commission describes these transactions as leaving "no residual VAT in the final price". Without the right to deduct, some VAT usually stays buried in the price. With it, none does.

Zero-rated vs exempt, nil-rated and out of scope

Four treatments produce a sale with no VAT or GST on the invoice, and only one of them lets you recover everything you paid on costs.

Treatment	Rate on the sale	Can you reclaim input tax?	Where the term is used
Zero-rated	0%, but the sale is taxable	Yes	Most VAT and GST systems
Exempt	None, and the sale is not taxable	No, as a rule	Every VAT and GST system
Nil-rated	0%, treated as exempt	No	India's GST
Out of scope	None, the sale is outside the system	Depends on why it is out of scope	UK VAT and others

Zero-rated vs exempt

An exempt supply is inside the VAT system but outside its taxable part. HMRC's guide says nothing is payable on it, "but, equally, the person making the supply cannot normally recover any of the VAT on their own expenses."

These are usually services that governments choose not to tax at all. The European Commission lists these among the supplies EU countries must exempt:

• Medical care and social services
• Most financial and insurance services
• Certain supplies of land and buildings

The UK's rate list makes insurance, lending, current accounts and Royal Mail's universal postal services exempt from VAT, among others.

The quick test: if the VAT on your costs comes back, the sale is zero-rated. If it does not, the sale is exempt.

Plenty of businesses make both kinds of sale. If you make taxable and exempt supplies and pay VAT on costs that relate to both, HMRC classes you as partly exempt. Its partial exemption notice warns that you "may not be able to recover all your input tax". A partial exemption method works out the share you can reclaim.

Is nil-rated the same as zero-rated?

No, and this is where many explanations go wrong. Under India's GST, nil-rated is a type of exempt supply.

The definition sits in the CGST Act, quoted in the GST Council's zero-rating explainer. An exempt supply is one "which attracts nil rate of tax or which may be wholly exempt from tax", and it carries no input tax credit.

The zero rate under GST is defined separately, in Section 16 of the IGST Act, as exports and supplies to Special Economic Zone developers or units. Those sales keep their credit, which can come back as a refund, as the section on returns explains. Our India GST guide covers registration and filing.

Zero-rated vs out of scope

Out of scope means the sale is outside the VAT system altogether. HMRC lists three cases where a supply is outside the scope of UK VAT:

• It is made by someone who is not a taxable person
• It is made outside the UK and the Isle of Man
• It is not made in the course or furtherance of business

The second case matters most for online sellers. When you sell services abroad, place of supply rules often put the sale outside the scope rather than zero-rating it.

HMRC's guide is blunt about it: "some supplies of services to overseas customers are zero-rated, but many are standard-rated". Check which rule applies before you set the rate to 0%.

Out-of-scope sales also stay out of UK taxable turnover, while 0% sales count.

Examples of zero-rated supplies

What qualifies for the zero rate is a policy choice, so the lists differ by country. These categories turn up most often:

Category	Where the zero rate applies (examples)	What to check
Exports of goods	UK, India, New Zealand; an exemption with the right to deduct in the EU	Proof that the goods left the country
Exported services	India, New Zealand; only some services in the UK	Place of supply rules, which may make the sale out of scope instead
Supplies to special economic zones	India	The supply is for the zone's authorized operations
Basic food	UK; EU countries may zero-rate foodstuffs within set limits	Items that are always standard-rated, such as confectionery, soft drinks and hot food
Books and newspapers	UK	The format and the rate list for your product
International freight and passenger transport	UK	Route and vehicle size conditions

Sources: HMRC's VAT rates on different goods and services, India's IGST Act as quoted by the GST Council, New Zealand's IRD, and the European Commission.

The same sale can get three different treatments in three countries. Financial services are exempt in the UK, yet New Zealand's IRD says some financial services, such as brokerage, "may be zero-rated" when supplied to certain recipients. Check the rate list of the country where the supply is taxed, not the one you are used to.

Are exports zero-rated?

Exports of goods are the most common zero-rated supply, but the 0% is conditional. HMRC's export notice sets out conditions that "must be met in full" for exported goods to qualify, including valid evidence that the goods left the UK. Without that evidence, the sale is taxed at the normal rate. The Incoterms you agree with the buyer decide which side handles export clearance.

In the EU, exports outside the EU and intra-EU supplies are legally exemptions, but exemptions that keep the right to deduct input VAT. The Commission notes that these "are sometimes called 'zero-rated' transactions" because no VAT is left in the price. India gives exports the zero rate under Section 16 of the IGST Act, and New Zealand zero-rates exported goods and a defined list of exported services.

Zero-rated VAT vs zero-rated GST

The mechanism is the same in VAT and GST systems. The vocabulary is what changes:

• UK VAT calls it zero-rated and publishes the 0% goods and services in HMRC's rate guidance. Sales at 0% also have their own UK VAT code, and our UK VAT guide covers the rest.
• EU VAT law calls it an exemption with the right to deduct input VAT. Member states may apply this "zero rate" to a maximum of seven categories of basic-needs goods and services, such as foodstuffs and medicines, according to the European Commission.
• India's GST reserves zero-rated supply for exports and sales into SEZs, and treats nil-rated sales as exempt.
• New Zealand's GST zero-rates exports of goods and services, among others, as set out by IRD. See our New Zealand GST guide.

Sales tax has no equivalent. A retail sales tax is charged once, on the final sale, and gives sellers no credit to reclaim. So there is nothing to zero-rate: a sale is either taxed or it is not.

Resellers buy stock without sales tax by using an exemption certificate instead. Our explainer on VAT, GST and sales tax covers the wider difference.

For the zero-rating rules in a specific country, start with its guide:

• Canadian GST/HST
• Australian GST
• Singapore GST
• South African VAT

How to invoice a zero-rated supply

A zero-rated invoice has to make the 0% obvious and, where the law asks for it, say why. Details vary by country, but a sound one does four things:

• Shows the rate on each line as 0%, never blank
• Keeps 0% items on their own subtotal, apart from standard-rated ones
• States the reason, such as export or reverse charge, where the law requires it
• Rests on evidence you keep, such as proof of export or the customer's validated VAT number

HMRC's rule for mixed invoices: zero-rated or exempt items must "show clearly that there's no VAT payable", and you must show a separate total for their values.

India draws a sharper line between the two. The GST Council explainer says a supply at the zero rate takes a normal tax invoice, while an exempt supply takes a bill of supply instead.

Not every 0% line is zero-rated. A B2B sale of services across a border often shows no VAT because the buyer accounts for it under the reverse charge mechanism. In that case the invoice should name the reverse charge, not the zero rate.

Quaderno Tax Engine makes this call at checkout. It determines whether each sale is taxable for the customer's location and product type. When a B2B customer's tax ID is valid, it applies the reverse charge and zero-rates the sale automatically. For everything else that belongs on the document, see our guide to tax invoices.

Reporting zero-rated sales on your return

Zero-rated sales go on your VAT return or GST return even at 0%. They are what entitles you to the deductions you claim, so the authority expects to see them.

Two things follow:

• Businesses selling mostly at 0% often get money back. The VAT on their costs is larger than the VAT on their sales, so the return ends in a repayment, as in the worked example above.
• Your input tax claim depends on the classification. HMRC lets you reclaim the VAT that "relates to the standard-rated, reduced-rated and zero-rated supplies you make," and in principle none of the VAT linked to exempt supplies.

GST systems pay that refund through their own routes. Under Section 16 of India's IGST Act, an exporter can sell under bond or Letter of Undertaking "without payment of integrated tax". It then claims a refund of its unused input tax credit. Paying the tax first and claiming it back is open only to the classes of persons, goods or services the government notifies.

Common mistakes with zero-rated supplies

Most errors with the zero rate come from treating it as a shortcut. These five cost businesses money most often, and our list of VAT filing mistakes covers the rest of the return:

• Leaving 0% sales off the return. They are taxable sales, and they support the input tax you claim.
• Zero-rating an export without evidence. If you cannot prove the goods left the country, the normal rate applies.
• Putting 0% on a cross-border service by default. Many are reverse charge or out of scope instead, and some are standard-rated.
• Expecting a credit on nil-rated or exempt sales. Only the zero rate keeps the right to reclaim.
• Copying one country's list to another. A product that is zero-rated in one country can be exempt or standard-rated in the next.

Keep the evidence with the sale: the export documents, the customer's validated VAT number and the invoice itself. That file is your answer if the tax authority asks why you charged nothing.

A zero-rated supply charges your customer nothing and leaves no VAT or GST stuck in your costs, provided you classify it correctly and keep the evidence. Treat 0% as a rate you have to justify, not as tax you can ignore.