VAT Exempt Goods and Services: what you need to know

VAT Exempt Goods and Services

Some goods and services are always exempt from VAT. They include the following:

Education and training
Finance and credit
Fundraising events (hosted by charities)
Insurance
Selling and letting of commercial land and buildings (exemption may be waived)
Subscriptions to membership organisations

Since these items are exempt from VAT, they are not taxable. Sales from exempt goods or services are not included in the taxable turnover total for VAT purposes. If you purchase VAT-exempt items for your business, there is no VAT to reclaim.

VAT Reduced-Rate Items

Certain items are set at a reduced VAT rate. If your business sells reduced-rate and VAT-exempt items, you are still required to register for VAT if you meet the threshold. Your company will be classified as a partially exempt business.

Suppose your company does not carry any VAT-exempt items, but you sell a lot of reduced-rate ones. In that case, you are not considered a partially exempt business.

If your business doesn’t sell exempt items but several reduced-rate ones, you are not considered a partially exempt business. HMRC considers your company a regular business with several reduced-rated products or services.

Examples of Reduced Rate Items

Car seats (Children)
Electricity, gas, and fuel (Domestic and residential use or non-business use by a charity)
Energy
Health
Heating
Maternity products
Mobility aids
Protective products and services

Difference Between VAT Exempt and Zero-rated Supplies

Zero-rated items are essential or critical components in a supply chain. Placing them in a zero per cent category makes them more affordable to consumers.

VAT-exempt items are treated differently from zero-rated supplies.

VAT is not added to the selling price for both categories of items
Zero-rated goods and services are taxable for VAT purposes. The rate is 0 per cent

Examples of Zero-rated Items

Animal feeding products
Books, brochures, pamphlets, leaflets, and other publications
Certain animals
Children’s clothing
Donated items sold in charity shops
Food and drink*
Plants and seeds
Prescription medicines

*There are some exceptions, such as alcoholic drinks and ice cream.

Certain businesses purchase zero per cent items and then use them to produce taxable things at a higher VAT rate. This often happens in businesses like restaurants, which purchase zero-rated food and drink ingredients, and VAT must be charged on the final product served to the customer.

Keep in mind that the zero rate is not the same thing as being tax-exempt. Some zero-rated items are VAT free. However, this is still considered a tax rate and your company must keep track of it in your VAT accounts. It must be reported on your VAT returns.

Perhaps you sell a combination of zero-rated and reduced-rate items. In that case, you must still account for the net amount of the sale when calculating your VAT taxable revenue.

VAT Exempt Businesses

Some businesses only sell or supply goods and services that are exempt from VAT. If this description fits your company profile, you run a VAT-exempt business. The following situations also apply to your company:

You can’t register it for VAT
You can’t recover any of the VAT you pay on your business purchases or expenses

This is different from a business that sells or supplies zero-rated goods or services to customers. If you own a zero-rated business, you can reclaim the VAT on purchases relating to your zero-rated sales.

Exemption from VAT Registration

Suppose your business mainly sells zero-rated items or only products in this category. In that case, you can apply for an exemption from VAT registration. Once the exemption is issued, you will not be able to reclaim VAT.

To apply for an exemption, you need to contact HMRC (Her Majesty’s Revenue and Customs) to make your request. You can apply online using HMRC’s tax registration service. The other option is to post a letter to:

BT VAT

HM Revenue and Customs

BX9 1WR

If you want to apply for an exemption but VAT is owed on some of your supplies, you must demonstrate that your input tax would usually be more than your output tax.

Input tax is the VAT you pay on goods and services you buy for your business.
Output tax is the VAT you claim on your taxable supplies.

If HMRC allows your exemption from registration, you will not be eligible to reclaim the input tax when purchasing goods or services for your business.

Mooncard Business Credit Cards Help You Track VAT

Mooncard corporate payment cards make it easy for your company to track employee expenses, including the VAT charged on purchases. Each time expenditure is charged to the card, the employee takes a photo of the receipt. The image is digitally stored for your records.

All the information is sent to your Accounts Department as accounting entries. It’s easy to track the amounts spent, the amount of VAT, which items are VAT exempt, and more. Your Accounts Department staff will appreciate that there is no need to re-enter anything.

Facts About VAT Exempt and Partial Exempt Goods and Services