At Pandey & Co, we often see businesses treat “VAT-free” sales as one and the same, but they’re not. Knowing the difference between zero-rated and VAT-exempt supplies can protect your margins and keep you clear of nasty HMRC surprises.
Why zero-rated isn’t the same as VAT-exempt
On the surface, both sell at 0% VAT: your customer pays nothing extra, and you don’t add VAT to your invoice. But the treatment behind the scenes is very different:
Zero-rated supplies You charge 0% VAT to your customer, and you can reclaim the VAT you’ve paid on your purchases (ingredients, materials, equipment, etc.). That means any VAT you incur in making the sale comes straight back into your business.
VAT-exempt supplies You also charge 0% VAT, but you cannot reclaim any of the VAT on costs related to that activity. All the VAT you pay on supplies becomes part of your expense, driving up your true cost.
A quick example:
Imagine you run a training company. You deliver a one-day workshop to a charity, this service is VAT-exempt. You don’t charge the charity VAT, but you’ve paid £100 in VAT for venue hire and course materials, £100 that you cannot reclaim.Now you run the same workshop for a private client. That supply is zero-rated, so you don’t charge VAT either, but HMRC will refund you the £100 VAT you paid on costs.
Common VAT-exempt supplies
Insurance
Finance and credit services
Education and training (when provided by qualifying bodies)
Charity fundraising events
Health and welfare services
Postal services
Betting and gaming
Membership subscriptions
Commercial land and property transactions (with conditions)
Each category comes with its own detailed rules, how it’s structured, who receives it, and whether any special conditions apply. Getting this distinction right can mean the difference between a neat VAT refund and an unexpected drain on your budget.
If you’re unsure where your supplies fall, reach out to Pandey & Co. We’ll help you map your services, claim every pound of input VAT you’re entitled to, and steer clear of costly VAT pitfalls.
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