Most countries employ a tiered VAT system. This means that while there is a "headline" rate that applies to most things, certain essential items are taxed less or not at all to help consumers.

1. Standard Rate

This is the default rate applied to most goods and services unless they are specifically listed as reduced or exempt.

UK: 20%
France: 20%
Germany: 19%
Spain: 21%

Applies to: Electronics, adult clothing, alcohol, restaurant meals (in some countries), consultancy services, cars, etc.

2. Reduced Rate

Governments apply a lower rate to items deemed essential or socially beneficial, such as energy, home renovations, or cultural events.

UK: 5% (e.g., home energy, children's car seats)
France: 10% (e.g., transport, renovation) and 5.5% (e.g., food, books)
Germany: 7% (e.g., food, books, cultural tickets)

3. Zero Rate (0%)

These goods are taxable, but the rate is 0%. This is a crucial distinction from "exempt" items. Businesses selling zero-rated goods can still reclaim VAT on their costs.

Common Zero-Rated Items (UK Example):

Most food (excluding restaurant meals and hot takeaways)
Children's clothes and shoes
Books and newspapers
Prescription medicines

4. Exempt Items

Some goods and services are completely outside the VAT system. If you sell exempt items, you cannot charge VAT, but you also cannot reclaim VAT on your business expenses.

Common Exemptions:

Financial services and insurance
Medical treatments by doctors
Education and training
Postal services

The "Jaffa Cake" Case

One of the most famous VAT disputes in the UK was about Jaffa Cakes. Cakes are zero-rated (food), but chocolate-covered biscuits are standard-rated (luxury). McVitie's successfully argued in court that Jaffa Cakes are cakes, not biscuits, because they go hard when stale (cakes) rather than soft (biscuits). This saved them millions in VAT!

How to Handle Different Rates

If you're using our VAT Calculator, you can easily switch between rates.

Use the 20% preset for standard goods.
Type in 5 or 10 for reduced rate items.
Type 0 for zero-rated items to see the net price equal the gross price.

Always check with your local tax authority (like HMRC in the UK) to confirm the correct rate for your specific products.

VAT Rates Explained: Standard, Reduced, and Zero Rates