VAT codes are your accounting software's shorthand for the rate and treatment of a transaction, and the letters differ between packages while the underlying categories do not. Getting them right matters because the code decides which box the transaction reaches, and the three that look interchangeable to a newcomer, zero-rated, exempt and out of scope, behave completely differently on the return.
The rate codes
Standard rate at 20%, which applies to most goods and services. Reduced rate at 5%, for some goods and services such as children's car seats and home energy. Zero rate at 0%, for zero-rated goods and services such as most food and children's clothes. All three are taxable supplies: they count towards your taxable turnover for the registration threshold, and their net values belong in box 6 for sales or box 7 for purchases even where no VAT arises.
Exempt is not zero, and out of scope is neither
An exempt supply carries no VAT and is not a taxable supply, so it does not count towards the registration threshold and, crucially, making exempt supplies restricts your ability to reclaim the input tax attributable to them. Postage stamps, financial and property transactions are the examples GOV.UK gives. Out of scope means outside UK VAT altogether, such as wages and most transactions between members of a VAT group. Coding an exempt sale as zero-rated overstates your taxable turnover; coding it out of scope hides it entirely.
Where each code lands
A standard-rated sale puts its VAT into box 1 and its net into box 6. A zero-rated or exempt sale puts nothing into box 1, and the zero-rated one still puts its net into box 6. A standard-rated purchase puts its VAT into box 4 and its net into box 7. A reverse-charge purchase puts VAT into box 1 and box 4 and the net into box 7. Reconciling a quarter usually means checking that each code produced the box movement it should have, rather than checking the total.
Questions people ask about vat codes
What are the UK VAT rates behind the codes?
Standard rate 20% on most goods and services, reduced rate 5% on some such as children's car seats and home energy, and zero rate 0% on zero-rated goods and services such as most food and children's clothes.
What is the difference between zero-rated and exempt?
Zero-rated is a taxable supply at 0%: it counts towards your threshold and its net goes in box 6. Exempt is not a taxable supply, does not count towards the threshold, and restricts the input tax you can reclaim.
Are VAT codes the same in every accounting package?
No. The letters differ between packages. The underlying categories, standard, reduced, zero, exempt and out of scope, do not.