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VAT Zero Rate – 0% is a rate of VAT

VAT zero rate

VAT zero rated supplies do not actually incur a charge, because the VAT is 0%.  This is different from VAT exempt supplies.

The zero rate of VAT entitles a business to be registered for VAT and, subject to the normal rules relating to the VAT invoice requirements, allows the business to recover VAT on expenditure. The making of solely VAT exmept supplies does not entitle a business to be registered for VAT and thus the business is unable to recover VAT incurred on expenditure.

Zero rate VAT items include supplies of the following items:

  • Food for human consumption;
  • Exported goods;
  • Some international services;
  • New dwellings;
  • Public transport;
  • Advertising services for charities and charity shops selling donated goods
  • Building services for disabled people and certain equipment for disabled people
  • Water supplied to households
  • Brochure printing
  • Printed books, magazines and newspapers
  • Children’s clothes and footwear.

The above list of supplies eligible to the VAT zero rate is not exhaustive.

VAT repayments

If a business makes supplies at the VAT zero rate the VAT it pays on purchases, known as Input Tax, may be more than the VAT it collects from customers. This means the business can claim the difference back from HMRC on a regular basis. Consequently some businesses choose VAT registration on a voluntarily basis even though the turnover is below the VAT registration threshold.

Correct VAT liability

For businesses, the implications of getting the VAT liability of supplies wrong can be significant. If a business treats a supply as being liable to the VAT zero rate and HMRC disagree it is probable that HMRC will raise a VAT assessment and a VAT penalty.

Therefore, it’s essential for businesses to have a thorough understanding how the VAT zero rate may apply to its supplies. If your business is unsure about the VAT liability of supplies, engaging an experienced VAT consultant is an important step.

Correct evidence

To ensure the VAT zero rate is allowed it can be important for a business to hold the correct evidence.  This can be of particular importance in relation to the VAT zero rate of exported goods, and supplies to disabled people. Evidence of export that is required to ensure zero rating can be official or commercial. It must be supported by supplementary evidence.

Exported goods

You must export the goods and get valid evidence of export within the time limits, usually 3 months. In all cases the time limits are triggered by the time of supply.

If you have not exported the goods within the time limits, or do not hold the necessary evidence to show that the goods have been physically exported, you must not zero rate the supply and must account for VAT at the appropriate UK rate.

In brief, the conditions in relation to exported goods are that:

  • the goods must be physically exported from the UK within the time limits; and
  • the exporter must obtain evidence of export to support zero rating.

Only exports that comply with these conditions are eligible for zero rating.

Can HMRC help

In the case of Tyne Valley Motorhomes v Revenue & Customs the business appealed assessments for VAT of £703,585. The issue related to the VAT zero rate treatment of motor homes adapted for disabled users. HMRC sought a penalty of £47,632 for allegedly giving HMRC inaccurate VAT returns which were carelessly inaccurate. An important fact in this case was that the buyers were accepted to be disabled and the business had kept good records establishing that the buyers were qualifying disabled persons.

An officer of HMRC reviewed sales invoices for adapted vehicles and customer declarations and raised no concerns about adaptations. In 2005 and 2006 it appears that HMRC conducted 4 other control visits and checked the zero-rating treatment and were satisfied that the business did all that could reasonably be expected to get the VAT right. The business followed the HMRC guidance for zero rating.

HMRC argued, unsuccessfully, that its own Public Notice with regard to the VAT zero rate was incorrect and that the appellants should have taken their own professional advice and ignored what they were told by HMRC.

VAT zero rate advice

Our team of VAT experts at Solve VAT are available to discuss the VAT zero rate on 0161 883 2120.