Tax and VAT
Zero-rated supply
A zero-rated supply is a taxable sale where the value-added tax rate is set to zero percent, allowing the seller to claim back the tax paid on their business expenses.
What is Zero-rated supply?
When you sell goods or services, your local tax authority determines the applicable value-added tax rate. A zero-rated supply is a taxable transaction where the government sets the tax rate at exactly zero percent. This often applies to essential items like basic food, healthcare, or exports. The most critical feature of a zero-rated supply is that it remains a taxable sale. Because you are making taxable sales, you have the right to recover the input VAT you paid on your business purchases. This is the main difference between zero-rated and exempt supplies. If your sales are exempt, you cannot claim back your input tax. By charging zero percent to your customer, you keep their costs low while protecting your own profit margins by recovering the tax on your expenses.
How Zero-rated supply works
The process begins when you purchase materials or services to run your business. Your suppliers charge you standard input VAT on these purchases, which you record in your accounting system. Next, you manufacture your product or prepare your service for sale. When you invoice your customer for a qualifying zero-rated item, you apply a tax rate of zero percent. The customer pays no tax on that specific transaction. At the end of your tax period, you file your tax return. You report the total value of your zero-rated sales. Then, you declare the input VAT you paid on your business expenses. Because your sales are zero-rated rather than exempt, the tax authority refunds the input tax you paid, or credits it against other tax liabilities.
- You purchase business supplies and pay standard input VAT to your vendors.
- You sell qualifying goods or services to your customers.
- You issue a tax invoice showing a zero percent tax rate.
- You report the zero-rated sales value on your periodic tax return.
- You claim a full refund for the input VAT paid on your expenses.
Worked example
Global Export Traders buys packaging materials for 1,000 plus a 5 percent standard input VAT, paying 1,050 in total. The 50 is their input tax. They use these materials to pack goods for export, which their tax authority classifies as a zero-rated supply.
They sell the exported goods for 4,000. Because the sale is zero-rated, they charge 0 percent tax, making the total invoice 4,000. When filing their tax return, they report 0 in output VAT and 50 in input VAT. Since zero-rated suppliers can recover input tax, the tax authority refunds the 50 to Global Export Traders.
Why it matters for your business
Understanding zero-rated supplies is vital for your cash flow and pricing strategy. If you mistakenly treat a zero-rated sale as an exempt supply, you will lose the opportunity to recover the input VAT paid on your overheads. This directly reduces your net profit margin. Conversely, applying a zero rate correctly ensures your goods remain competitively priced for your customers while you recoup your tax costs. Using a system like Paper & Pen, which creates invoices and tracks stock, helps you apply the correct tax codes to every item so your tax returns are accurate and your refunds are secure.
See also
Questions
Common questions
What is the difference between zero-rated and exempt supplies?
Do I need to issue a tax invoice for zero-rated sales?
Do zero-rated sales count towards the VAT registration threshold?
Related terms
- Exempt supply An exempt supply is a sale of goods or services that does not attract value-added tax and prevents the seller from reclaiming the tax paid on their associated business expenses.
- Input VAT Input VAT is the value-added tax that a registered business pays on goods and services purchased for its own operations, which can typically be recovered from the tax authority.
- Output VAT Output VAT is the value-added tax that a registered business calculates and charges to its customers on the sale of taxable goods and services.
- Taxable supply A taxable supply is any provision of goods or services made in the course of business that is subject to value-added tax under local tax laws.
- VAT return A VAT return is an official tax document submitted to a government authority that summarises a business's total sales, purchases, and the resulting value-added tax payable or refundable for a specific period.
- Corporate income tax Corporate income tax is a direct levy imposed by a government on the net profits or taxable income earned by a registered company during a specific financial period.