ACCA Advanced Taxation (ATX) Practice Exam

Which of these is NOT a zero-rated supply in VAT legislation?

1. Children's clothing

2. Exported goods

3. Luxury watches

4. Medicine

The correct answer is: Luxury watches

In VAT legislation, zero-rated supplies are those goods and services that are taxable at a rate of 0%, meaning that no VAT is charged on the sale, but the seller can still reclaim any input tax incurred. Common examples of zero-rated supplies often include essential items like children’s clothing, exported goods, and medicine. Luxury watches do not fall under the zero-rated category because they are considered non-essential items, and their sale typically attracts the standard VAT rate. This distinction is vital as it highlights the government's approach to encouraging the consumption of basic necessities while applying standard rates to luxury items. Consequently, luxury watches are not afforded the same VAT treatment as other items classified as zero-rated.