Taxation (UK) · The computation of VAT liabilities

Standard, Reduced, Zero-Rated and Exempt Supplies in UK VAT

Updated 11 October 2026 · Fact-checked

UK VAT supplies fall into four groups. Standard-rated supplies carry 20% VAT. Reduced-rated supplies carry a lower rate. Zero-rated supplies are taxable at 0%, so input tax is recoverable. Exempt supplies are outside VAT charge, so you charge no VAT and usually cannot recover related input tax.

Understand Supply Types: Standard, Reduced, Zero-Rated, Exempt

VAT is a tax on the supply of goods and services. A business that makes taxable supplies and is VAT registered charges output tax to customers. It reclaims input tax on its own purchases. The difference is paid to HMRC, or repaid by HMRC.

The key question is: which category is the supply in? The category decides two things. First, how much VAT you charge the customer. Second, whether you can recover the input tax on your costs.

Standard-rated supplies carry VAT at 20%. This is the default. If a supply is not specifically zero-rated, reduced-rated or exempt, treat it as standard-rated. Reduced-rated supplies carry a lower rate. The rate table ACCA gives you shows only the standard rate, so if a lower rate matters, the question will state it.

Zero-rated supplies are taxable, but the rate is 0%. The customer pays no VAT. Because the supply is taxable, the supplier can still recover input tax. A zero-rated trader often gets a repayment from HMRC. Common examples are most food, children's clothing, books and newspapers, and public transport.

Exempt supplies are not taxable supplies. The supplier charges no VAT and, in general, cannot recover input tax linked to those supplies. That VAT becomes a cost. Common examples are insurance, postal services by the universal provider, finance, betting, education and health services, and the sale or letting of land (subject to options and exceptions). A business making only exempt supplies cannot register for VAT. A business making both taxable and exempt supplies is partially exempt, and input tax recovery needs apportionment.

Key rules to remember

Standard rate: Standard rate = 20%; Given in the ACCA tax tables. Applies unless the supply is zero-rated, reduced-rated or exempt.
VAT on a VAT-exclusive price: Output VAT = net price × 20%; Use 20% on the net amount. Gross price = net × 1.20.
VAT in a VAT-inclusive price: VAT = gross × 20/120 (or 1/6); Use this when a standard-rated price already includes VAT.
Zero-rated supply: Output VAT = 0; input tax recoverable; Counts as a taxable supply. Counts towards the registration threshold of £90,000.
Exempt supply: Output VAT = none; input tax generally not recoverable; Not a taxable supply. Does not count towards the registration threshold.
Net VAT payable: Output tax − recoverable input tax; A negative answer means a repayment from HMRC.

How to solve Supply Types: Standard, Reduced, Zero-Rated, Exempt questions

Use this method for any question that asks you to classify supplies or compute VAT.

1Identify each supply made by the business, one at a time.
2Decide its category: standard, reduced, zero-rated or exempt. If you are unsure and the question gives no clue, treat it as standard-rated.
3Compute output tax. Use 20% on VAT-exclusive amounts, or 20/120 on VAT-inclusive amounts. Zero-rated and exempt supplies give nil output tax.
4Link each cost to the supplies it relates to. Input tax on costs for taxable supplies (standard, reduced or zero-rated) is recoverable.
5Treat input tax on costs for exempt supplies as irrecoverable unless the question gives a rule or a de minimis test. Add it to the cost.
6Calculate net VAT: output tax minus recoverable input tax. State whether it is payable or repayable.
7Add a short comment, such as why a zero-rated trader gets a repayment while an exempt trader does not.

Quickest way: Three-question classification check

When to use it: Use it in Section A and Section B objective test questions, where speed matters and each answer is all or nothing.

Ask: is the supply exempt or zero-rated? If neither, it is standard-rated.
Ask: does the supplier charge VAT? Standard and reduced: yes. Zero-rated: 0%. Exempt: none.
Ask: can the supplier recover input tax? Taxable supplies (including zero-rated): yes. Exempt: no.
Remember that exempt means no VAT and no recovery, while zero-rated means 0% and full recovery.

Common mistakes in Supply Types: Standard, Reduced, Zero-Rated, Exempt

Saying zero-rated and exempt supplies are the same because the customer pays no VAT.
The customer sees the same result, so the difference in the supplier's position is overlooked.
Fix: Focus on the supplier. Zero-rated is taxable, so input tax is recoverable. Exempt is not taxable, so input tax is generally not recoverable.
Recovering input tax on costs of making exempt supplies.
Students assume all VAT on business costs can be reclaimed.
Fix: Match each cost to the supply it serves. If it serves an exempt supply, treat the VAT as part of the cost.
Counting exempt supplies towards the £90,000 registration limit.
Students treat all sales as turnover.
Fix: Only taxable supplies count. Include zero-rated supplies. Exclude exempt supplies.
Applying 20% to a VAT-inclusive price.
Rushing and not checking whether the figure includes VAT.
Fix: Read the wording. For a gross price, divide by 6 (20/120). For a net price, multiply by 20%.
Ignoring that a zero-rated trader can be in a repayment position.
Students assume net VAT is always payable.
Fix: With nil output tax and recoverable input tax, the net figure is negative. Show it as a repayment due from HMRC.

Worked examples

Example 1

Bright Books Ltd is VAT registered and sells only books, which are zero-rated. In a quarter, sales were £60,000. It paid £25,000 for printing and rent, all exclusive of VAT, and all standard-rated. Calculate the VAT payable or repayable for the quarter.

Show the solution

Output tax: books are zero-rated, so 0% × £60,000 = £0.
Input tax: £25,000 × 20% = £5,000.
Zero-rated sales are taxable supplies, so all the input tax is recoverable.
Net VAT = £0 − £5,000 = −£5,000.

Answer: Bright Books Ltd is due a VAT repayment of £5,000 from HMRC.

Example 2

A business makes two kinds of supply. Standard-rated sales are £40,000 excluding VAT. It also makes exempt sales of £10,000. Input tax of £3,000 relates wholly to the standard-rated sales. Input tax of £800 relates wholly to the exempt sales. Ignore any partial exemption de minimis test. Calculate net VAT payable.

Show the solution

Output tax on standard-rated sales: £40,000 × 20% = £8,000.
Exempt sales: no output tax.
Input tax of £3,000 relates to taxable supplies, so it is recoverable.
Input tax of £800 relates wholly to exempt supplies, so it is not recoverable.
Net VAT = £8,000 − £3,000 = £5,000.

Answer: Net VAT payable is £5,000. The £800 is irrecoverable and becomes a cost of the business.

Exam tips

In objective tests, the classification is often the whole question. Learn the common zero-rated and exempt examples until you can sort them instantly.
Always state the effect on input tax. Markers reward the link between category and recovery.
Check whether a price is VAT-inclusive before you calculate. Underline the word in the question.
In Section C, set out output tax and input tax in separate lines, and label each as recoverable or irrecoverable.
Remember that only taxable supplies count towards the registration limit of £90,000. Exempt supplies do not.

Practice questions from The computation of VAT liabilities

Supply Types: Standard, Reduced, Zero-Rated, Exempt in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Supply Types: Standard, Reduced, Zero-Rated, Exempt: frequently asked questions

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

Zero-rated supplies are taxable at 0%, so the supplier can recover input tax. Exempt supplies are not taxable, so the supplier charges no VAT and generally cannot recover related input tax. The customer pays no VAT in both cases.

What is the standard rate of VAT in the UK for ACCA TX?

The standard rate is 20%. It is given in the tax tables supplied in the exam. Any supply not zero-rated, reduced-rated or exempt is standard-rated.

Which supplies are exempt from VAT in the UK?

Typical exempt supplies include insurance, finance, betting, education and health services, and most sales and lettings of land. Always check the exact wording in the question, as options and exceptions can apply.

Do zero-rated sales count towards the VAT registration threshold?

Yes. Zero-rated supplies are taxable supplies, so they count towards the £90,000 registration limit. Exempt supplies do not count.