What does it mean for a supply to be 'zero-rated' for VAT purposes?

A supply being 'zero-rated' for VAT purposes means that no VAT is charged on that particular supply. However, it’s important to note that businesses making zero-rated supplies are still allowed to reclaim any input VAT they incurred when purchasing goods or services that relate to those supplies. This enables businesses to maintain their cash flow and ensures that they do not lose out on potential VAT credits despite not charging VAT on their sales.

In contrast, other options don't accurately capture the definition of zero-rated supplies. For example, charging VAT at a standard rate incorrectly describes the nature of zero-rated supplies. The concept of eliminating VAT completely does not apply since businesses can still engage in zero-rated transactions while regaining input VAT. Lastly, the idea of VAT being charged but paid later suggests an ongoing obligation to remit VAT, differing from zero-rated supplies where the entire transaction is VAT-free.