UK VAT rates: standard, reduced, zero and exempt explained

The standard rate (20%)

Most goods and services are standard-rated at 20% — the default. If a supply is not specifically reduced-rated, zero-rated or exempt, it is standard-rated. This is the rate the VAT calculator uses by default.

The reduced rate (5%)

A 5% rate applies to a defined list — domestic fuel and power, children's car seats, some energy-saving materials and certain renovations. It is narrow and specific; you cannot apply it by analogy, so check the item is actually on the reduced-rate list before charging 5%.

Zero-rated vs exempt: the key difference

Both mean the customer pays no VAT, but they are opposites for you. Zero-rated supplies (most food, books, children's clothes, exports) are taxable at 0% — you charge nothing but you can reclaim input VAT on your costs. Exempt supplies (insurance, some property, financial services) carry no VAT and you generally cannot reclaim related input VAT. Confusing the two is a classic, costly error — see partial exemption.

Why zero-rating is valuable

A wholly zero-rated business — say a bakery selling most food, or an exporter — charges no output VAT but reclaims all its input VAT, so it is usually in a permanent refund position. That is a genuine cash-flow advantage. An exempt business gets neither side of the deal.

Getting the rate right on every line

Mixed businesses must apply the right rate to each product, which is where errors and HMRC assessments arise. Good systems and clear product coding prevent expensive mistakes.

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