What is VAT Exempt?

VAT exemption usually refers to two things either goods or services that are not liable to VAT, or organisations that are ineligible for VAT registration.

In general when products or services are sold a government tax called value added tax (VAT) is added to the original price.

There are specific goods and services that are exempt from VAT which means they are not subject to VAT and do not require the tax to be included in their price.

Businesses, charities, and other types of organisations can also qualify for VAT exemption. A business is considered VAT exempt if it exclusively sells VAT exempt products or if it does not engage in taxable “business activities.”

For business owners it’s important to understand which of your goods or services are liable for VAT and those that are exempt because this affects your ability to register for VAT or to claim a VAT rebate.

Is my business VAT exempt?

If your business is exempt from VAT all of the services and/or goods you provide are defined as exempt.

As a business VAT exempt means you cannot register for VAT and cannot claim a VAT rebate for business expenditure.

Partly exempt business’ are considered ‘partly exempt’ by HMRC if you are VAT registered and pay VAT on resources that are used to make exempt products.

A partly exempt business provides both taxable and exempt supplies and can only reclaim  input tax that is directly related to taxable supplies.

What goods and services are exempt from VAT?

It is important to note that exempt goods and services’ and zero rated items are not the same thing.

Neither has VAT incorporated into the price, but zero rated products are liable for 0% VAT. The main difference is that you can reclaim VAT on things bought in connection to zero rated sales.

The following are an example of common goods and services that are exempt from VAT.

• Charity fund raising.
• Membership organisations’ subscription fees.
• Training and education.
• Commercial land and buildings; letting, leasing and selling. This can be waived in order to reclaim that VAT on your business expenditure. It is known as ‘opting to tax land and buildings’ and involves charging the standard rate of VAT.
• Finance, insurance, credit.
• Postage stamps.

You can find a comprehensive list of VAT exempt products and services online at .GOV which gives a breakdown by sector on whether VAT is applicable.

The sales of any of these exempt items are not included in your taxable turnover (for VAT purposes) and you cannot reclaim VAT on any exempt purchases.

What is partly VAT exempt?

For businesses with both taxable and exempt supplies that incurs tax on costs related to both it is typically considered by HMRC as partly exempt from VAT.

Being classed as partly VAT exempt means you may not be able to fully recover all of your input tax.

Input tax specifically refers to the value added tax that is levied on the purchases and expenses made by your business on only taxable supplies and not supplies that are exempt from VAT.

It applies to qualifying business costs that include standard, zero or reduced rates of VAT.

An example of a business cost where input tax cannot be reclaimed is a car and it’s delivery charges.

If you engage in or plan to engage in both taxable and exempt transactions and accumulate input tax that applies to both types HMRC needs you to use a partial exemption rule (called the partial exemption method) to determine the amount of input tax you can recover.

Claiming VAT for partly exempt businesses

You can only reclaim the VAT paid on business purchases. If the goods and/or services are partially for business and partially for personal use then you can reclaim the applicable business proportion of the VAT paid.

As part of your accounts you are obliged to record your exempt sales separately to the taxable and detail your calculations relating to a VAT rebate claim.

Under making tax digital for VAT requirements your record keeping must be compliant and be available as evidence if HMRC needs them.

Capital goods scheme for assets

Any business acquisition that costs over a certain amount is considered a capital asset.

For example:

Spend of £50,000+ on an individual computer or item of computer equipment.

Spend of £50,000+ on a boat, ship or aircraft.

Spend of £250,000+ on building or civil engineering works, or on buildings or land.

Once you have such an asset, you will probably need to alter the amount of input tax you reclaim by using the capital goods scheme.

The capital goods scheme permits the distribution of the initial VAT claimed over a span of years.

The amount of VAT you can reclaim will vary according to how much any capital goods asset is involved with producing taxable ‘supplies’.

In other words, as the proportion of taxable supplies goes up or down, so does the amount of VAT rebate you are entitled to.

If the proportion of your taxable supplies rises, you can reclaim a greater amount, but if it decreases you will be required to repay some.

What is zero rated for VAT?

VAT exemption and 0% VAT are not the same but can sometimes be easily confused.

While both zero rated and VAT exempt products do not have an additional charge on the original sales price there are significant distinctions between them for accounting and HMRC purposes.

In technical terms zero rated products are still subject to taxation whereas VAT exempt products are not.

This means that sales of zero rated goods and services are included in your taxable turnover, unlike sales of VAT exempt products.

VAT registered businesses should record sales of zero rated products in their VAT accounts, while non taxable sales should only be recorded in your regular company accounts.

Reduced rate VAT items

The reduced rate of VAT is lower than the usual rate and applies to items that the government considers as essential for example energy costs.

A reduction in VAT can also be used to help lower the cost of goods and services for consumers which can ultimately stimulate increased spending in the economy.

Reduced rate VAT is usually set at 5% with 12.5% used in some specific cases.

VAT relief for people who are disabled or have a long term illness

If you have a qualifying disability or chronic illness you won’t have to pay VAT on products that are specifically designed or modified for personal or domestic use.

In addition to the item purchased VAT won’t be applied to the installation and any additional work required, repairs or maintenance, as well as spare parts or accessories.

You need to meet HMRC’s requirements to qualify and declare your eligibility to HMRC in writing.

Our VAT relief for disabled people guide can give you some more details on qualifying criteria and how to claim the relief.