We are often asked what all the different VAT rates are and what they mean. Zero-rated is the same as Exempt, right? Wrong. Read our guide below to make sure you understand the difference between all the rates and ensure you are recording and claiming your VAT correctly.
Standard Rate
Like it sounds, this is the standard rate of VAT, applied to the majority of VAT transactions. It currently stands at 20%, rising from 17.5% in January 2011.
Reduced Rate
The reduced rate is 5% and applies to a limited range of goods and services including energy and child car seats, for example.
Zero Rate
Zero rated goods and services are still subject to VAT, but at a rate of 0%. This is different to Exempt which has no VAT applied. New buildings, books and children’s clothing are all zero-rated items. Airline tickets are zero-rated but people are often confused when they see taxes applied on them. These are airport taxes, totally separate to VAT and not reclaimable as input VAT.
Exempt
Any exempt goods or services are not subject to VAT. Sporting activities, gambling, some educational services, insurance, funeral services and charitable fundraising events are all exempt items.
Outside the scope
These transactions fall totally outside of the UK VAT system and have no rate applied to them – they appear as ‘No VAT’ in Xero. Postage stamps purchased from the post office are outside the scope, but using a courier for a delivery would be standard rated.
Zero-rated, exempt and outside No VAT all result in the same amount of VAT payable, but all appear in different places on the VAT return so it’s important to make the correct distinction.
Complications
Some areas can become quite complicated regarding what VAT should be charged, depending on the condition and way something is sold.
The majority of food and drink is zero rated when bought from a supermarket, but some items always have the standard rate applied to them including alcoholic drinks, confectionery, crisps and savoury snacks, hot food, sports drinks, hot takeaways, ice cream, soft drinks and mineral water.
Food bought in a restaurant or takeaway is standard rated – you are paying VAT on the service of having it cooked and served – unless its cold food from a takeaway, in which case it is zero rated unless it can be eaten in a designated area on the premises. You may have heard of the ‘Sausage Roll’ tax, a term coined when it was decided that VAT would be charged if the sausage roll was heated up for you, but not if you took it cold.
It can get complicated, so if you are unsure of the relevant VAT rate on a certain good or service then either check with your accountant, or check out the HMRC website here.