Q. Why is it important to differentiate between items that are zero-rated for VAT and those that are exempt?
A: Although both zero-rated and exempt supplies result in no VAT being applied to the supply, they are very different, and it is important to understand the distinctions.
Zero-rating is a rate of VAT, albeit at zero per cent. The goods and/or services to which it applies are taxable supplies. This in turn renders any supplier of zero-rated goods and/or services liable to register for VAT, where appropriate. Please see the GOV.uk website for further information on registration. The advantage of VAT registration is that VAT can be reclaimed on costs.
However, a business making solely exempt supplies is not making taxable supplies, so cannot register for VAT. Consequently, all VAT incurred upon expenditure becomes an additional irrecoverable cost.
Where a supply could be either zero-rated or exempt, zero-rating takes priority.