Zero-rated and exempt transactions

The four VAT treatments

In UK VAT, every supply falls into one of four categories:

Treatment	VAT charged	Reclaim input VAT?	Included in Box 6?
Standard rate (20%)	20%	Yes	Yes
Reduced rate (5%)	5%	Yes	Yes
Zero rate (0%)	0%	Yes	Yes
Exempt	None	No (usually)	Yes
Outside the scope	None	Depends	No

The key distinction most people get wrong: zero-rated is not the same as exempt. Zero-rated supplies are taxable at 0% — the supplier can still reclaim input VAT on their costs. Exempt supplies are not taxable — and the supplier cannot reclaim input VAT on costs related to those supplies.

Common zero-rated supplies

• Most food and drink (except catering, alcohol, confectionery, crisps)
• Books, newspapers and magazines
• Prescriptions and most medicines
• Children’s clothing and footwear
• Public transport
• New residential construction
• Exports of goods outside the UK

Common exempt supplies

• Financial services (bank charges, insurance, mortgages)
• Medical services (by registered healthcare professionals)
• Education and training (by eligible bodies)
• Residential letting (rent from property)
• Betting and gaming
• Postal services (Royal Mail)

Outside the scope

Transactions outside the scope of VAT are not supplies for VAT purposes:

• Wages and salaries
• Insurance claims received
• Dividends
• Loan repayments (the repayment element, not interest)
• Grants received
• Transfers between group entities

Setting VAT treatments in AccBooks

Default per nominal code

Each nominal code in your chart of accounts has a default VAT treatment. To set it:

1. Go to Settings → Chart of accounts.
2. Click the nominal code.
3. Under VAT default, choose: Standard (20%), Reduced (5%), Zero, Exempt, or Outside scope.
4. Save.

When you classify a transaction to this code, AccBooks automatically applies the default treatment.

Overriding on a transaction

You can override the VAT treatment on any individual transaction:

1. Open the transaction in the reconciliation queue or journal.
2. Click the VAT treatment dropdown.
3. Select the correct treatment.

Overrides are logged in the audit trail with a reason field.

Partial exemption

If your business makes both taxable and exempt supplies, you can only reclaim a proportion of your input VAT. This is called partial exemption. AccBooks calculates your partial exemption percentage automatically using the standard method. Go to Settings → VAT → Partial exemption to configure this.

Impact on VAT return

Box	Effect
Box 1	Only standard and reduced-rate output VAT
Box 4	Input VAT reclaimed (zero-rated purchases qualify; exempt purchases don’t)
Box 6	All taxable supplies (standard + reduced + zero) at net value
Box 7	All purchases that generate input VAT claims

Outside-the-scope transactions don’t appear in any box.