Tax classes explained: standard, zero-rated and exempt

Each line item has a tax class that determines the VAT charged and how it appears on your return. Assigning the right class per catalogue item is one of the most important things you can do for clean VAT.

The three classes

• Standard-rated — VAT is charged at the prevailing standard rate. Most goods and services.
• Zero-rated — VAT applies but at 0%. The supply is taxable (it appears on the return) but no VAT is added. Certain basics and exports fall here.
• Exempt — no VAT applies at all and it's outside the VAT charge. Some financial, medical and educational supplies are exempt.

Why zero-rated and exempt are not the same

They look similar on a receipt (no VAT added) but report differently, and they affect input-tax recovery differently. Using the wrong one distorts your VAT return, so classify each product deliberately.

How to set it

1. Assign a tax class (and HS code) to each item in your catalogue once.
2. When you add the item to an invoice, the class comes through automatically.
3. PI Fiscal totals each class separately for your Z-report and VAT schedule.

Tax-inclusive vs exclusive prices

Decide whether your prices already include VAT or not, and set this consistently. If totals look off, this setting is the usual cause.