What characterizes zero rated supplies?

Zero rated supplies are characterized by being taxed at a rate of 0%. This means that while these supplies are subject to VAT (Value Added Tax), the effective rate applied is zero. As a result, businesses can still reclaim any VAT input costs incurred in the production or provision of these supplies, which can be beneficial for cash flow and overall tax efficiency.

For example, certain essential goods and services such as basic food items, children's clothing, and books may be categorized as zero rated. This classification encourages consumption of these goods and makes them more affordable for consumers.

The other options differ in their definitions: completely non-taxable supplies fall under a different category and do not attract any VAT; supplies taxed at a rate of 20% are standard-rated and are subjected to the normal VAT rate; and luxury goods are typically not solely linked to zero-rated supplies, as they are usually standard-rated or higher, unlike zero-rated categories which are focused on essential items.