What’s the difference between Zero-Rated, Exempt, and Out of Scope VAT charges?

A simple no-nonsense explanation of the differences in VAT classification

Written by 
James Morgenstern
Updated on
May 28, 2024

When completing your VAT return it's important to understand the differences between zero-rated, exempt, and out of scope costs. 

Each classification dictates how these costs are handled on your VAT return so it’s important to get it right. We break the differences down, with common examples and how they’re applied in your VAT return.

Zero-Rated:

When a cost is zero-rated for VAT, it does have VAT charged on it, but at a rate of 0%. 

  • Example: Common zero-rated expenses include: books, newspapers, and various travel expenses such as train, bus and air fares. 
  • On your VAT return: Despite VAT being present, it stands at £nil, resulting in no VAT to reclaim. Consequently, zero rated costs reflect £nil in box 4, while the total expense is accounted for in box 7.

Exempt:

Costs that are VAT exempt, do not have VAT charged on them. 

  • Examples: Common VAT exempt expenses include: stamps, insurance and financial services, bank charges, and specific medical services. 
  • On your VAT return: Since there's no VAT, exempt costs means there’s no VAT to be recorded in box 4 of your VAT return. However, the total expenditure is still detailed in box 7.

Out of Scope:

Costs that fall under the out of scope category are outside the remit of the UK VAT system. This means that VAT does not apply to them. 

  • Examples: Expenses from non-VAT registered businesses, salaries, pensions, dividends and tax payments are all ‘out of scope’ VAT expenses. 
  • On your VAT return: These costs do not feature on your VAT return, as there's no VAT to reclaim. Hence, they neither impact box 4 nor contribute to the total in box 7.

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