UK VAT Rates Explained: Standard, Zero-Rated, Exempt and Overseas Sales

VAT looks simple from a distance: charge 20%, hand it to HMRC, done. Up close it's anything but. The UK has three rates of VAT, plus two more categories — exempt and outside the scope — that carry no VAT at all but behave very differently from each other. Add overseas customers into the mix and it's easy to get the VAT return wrong even when no VAT is actually due. Here's how it all fits together.

The five categories at a glance

• Standard rate (20%) — the default for most goods and services.
• Reduced rate (5%) — a short list including domestic fuel and power, children's car seats and certain mobility aids and energy-saving installations.
• Zero rate (0%) — still a taxable rate, just at 0%. Covers most food, books and newspapers (including digital editions), children's clothing and footwear, most passenger transport, new-build homes and exports of goods.
• Exempt — no VAT, and not a taxable supply at all. Covers insurance, most financial services, education by eligible bodies, health and welfare services, betting and gaming, and most residential lettings.
• Outside the scope — not within the UK VAT system in the first place: wages, dividends, statutory fees, genuine grants and donations, and many sales to overseas customers.

Zero-rated is not the same as exempt

This is the distinction that catches people out, because to the customer both look identical: no VAT on the invoice. To the business they are worlds apart.

Zero-rated sales are taxable sales. They count towards the £90,000 VAT registration threshold, and because they're taxable you can reclaim the input VAT on the costs of making them. A bookshop or a food wholesaler can be fully VAT-registered, charge no VAT on most of its sales, and still recover VAT on rent, stock and overheads — often ending up with regular repayments from HMRC.

Exempt sales are not taxable sales. They don't count towards the registration threshold, and you generally cannot reclaim input VAT on costs used to make them. A business that makes only exempt supplies — a residential landlord, say — usually can't register for VAT at all. A business with a mix of taxable and exempt income falls into partial exemption, where input VAT has to be apportioned and some of it is lost. If that's you, the calculations are fiddly and well worth professional help.

Outside the scope

Some money movements simply aren't supplies for VAT purposes: salaries, dividends, loans, genuine donations, HMRC penalties, and charges imposed by statute. These don't appear anywhere on the VAT return. But — and this matters for the next section — certain sales can also be outside the scope of UK VAT because of where the customer belongs, and those are treated quite differently on the return.

Selling services to overseas businesses (B2B)

For most services, the place of supply for business customers is where the customer belongs. Sell consultancy, accounting, design, software development or most other services to a business in France, the US or anywhere else outside the UK, and the supply is outside the scope of UK VAT. You charge no VAT; your customer deals with any tax at their end (in many countries via a reverse charge, and it's good practice to note that on the invoice).

Keep evidence that the customer is genuinely in business — a VAT or tax registration number, or commercial evidence such as contracts and their website. Without it, HMRC expects you to treat the sale as a consumer sale.

Selling services to overseas consumers (B2C)

Consumer sales work the other way round. The general rule for B2C services is that the place of supply is where the supplier belongs — so a UK business normally charges UK VAT to private individuals wherever they live.

There are two big exceptions:

• Professional and intangible services — consultancy, legal, accountancy, advertising and similar services supplied to consumers who live outside the UK are outside the scope of UK VAT.
• Digital services — automatically delivered digital products (downloads, streaming, e-services) sold to EU consumers are taxed where the consumer lives. No UK VAT, but you may need to register for the EU's non-Union OSS scheme (or in individual countries) to account for the local VAT.

Watch out, though: some services — land and property, admission to events, passenger transport, hire of goods — have their own place-of-supply rules, and evidence requirements can change the treatment.

Goods: exports and imports

Exports of goods to customers outside the UK are zero-rated, provided you hold evidence of export within the time limits — so they're still taxable sales at 0%, not outside the scope. On the import side, most VAT-registered businesses use postponed import VAT accounting: the import VAT is declared and reclaimed on the same return rather than paid at the border.

What goes in which box on the VAT return

This is where the labels above earn their keep, because the boxes don't just follow the money — they follow the VAT category.

Box 6 (total value of sales, excluding VAT) includes more than most people expect:

• standard-rated, reduced-rated and zero-rated sales;
• exempt sales;
• sales that are outside the scope of UK VAT because of the place-of-supply rules — so yes, an overseas B2B sale of services goes in box 6 even though there's no VAT on it;
• zero-rated exports of goods.

What stays out of box 6: dividends received, loans received, insurance claim proceeds, genuine grants and donations, and money that was never a supply in the first place.

Box 1 (VAT due on sales) takes the output VAT on your standard and reduced-rate sales — plus the reverse charge VAT on services you buy from overseas suppliers. When you buy services from abroad, you account for UK VAT yourself: the VAT goes in box 1, is usually reclaimed in box 4, and the net value of the purchase goes in both box 6 and box 7.

Box 4 (VAT reclaimed) covers input VAT on purchases, reverse charge VAT you can recover, and postponed import VAT.

Box 7 (total value of purchases) includes your business purchases, imports of goods and reverse-charge services — but not wages, dividends paid, taxes, loan repayments, or loans made or anything outside the scope entirely.

Getting it right

Most VAT errors we see aren't about the VAT itself — they're about categories: exempt income treated as zero-rated, overseas sales left out of box 6, or reverse charge purchases missed entirely. None of them change the tax due dramatically, but they distort the return, and repeated errors attract HMRC's attention.

One caveat: this guide covers the general rules. The detail sits in HMRC's VAT Notice 700/12 (how to fill in your return) and Notice 741A (place of supply of services), and we're happy to check your specific position.

We prepare and review VAT returns for businesses across Kent and the UK, including those selling internationally. If you'd like a second pair of eyes on how your sales are categorised, book a free consultation.