VAT: exemption and partial exemption
If some of the goods or services you supply are exempt from VAT this can affect how much VAT you can reclaim on your purchases.
Some goods and services are exempt from VAT. If all of the goods and services you sell are exempt, your business is exempt and you won’t be able to register for VAT. This means you can’t reclaim any VAT on your business purchases or expenses.
If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.
Exempt goods and services
There are some goods and services on which VAT is not charged, including:
- insurance, finance and credit
- education and training
- fund raising events by charities
- subscriptions to membership organisations
- selling, leasing and letting of commercial land and buildings - this exemption can be waived
These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes. And if you buy exempt items, there is no VAT to reclaim.
Exempt items are different from zero-rated supplies. In both cases VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT - at 0%.
If you only sell or otherwise supply goods or services that are exempt from VAT then yours is an exempt business and:
- you cannot register for VAT
- you cannot recover any VAT you incur on your purchases or expenses
This is in contrast to where you sell or otherwise supply zero-rated goods or services. Here you can reclaim the VAT on any purchases that relate to those sales. If you sell mainly or only zero-rated items, you can apply for an exemption from VAT registration. If you are exempted from registration you will not be able to reclaim any VAT.
Partly exempt business
Your business is partly exempt if your business has incurred VAT on purchases that relate to exempt supplies. This is known as exempt input tax.
Generally, you won’t be able to reclaim exempt input tax. However, provided the amount of exempt input tax is below a certain amount, it can be recovered in full.
Non-business use in a partly exempt business
You can’t reclaim VAT you pay on goods and services that aren’t for business purposes. If your business is partly exempt and you buy goods or services that you use partly for business and partly for non-business purposes you must split the VAT accordingly. You then use your partial exemption method to work out how much of the business VAT you can reclaim.
Keeping records if your business is partly exempt
If you make both taxable and exempt supplies, you must keep a separate record of your exempt sales and details of how you’ve worked out how much VAT to reclaim.
Land and buildings
If you sell, lease or let commercial land or property, you can choose to waive the exemption and to charge VAT at the standard rate. This is known as ‘opting to tax land and buildings’. VAT incurred in making taxable supplies can be reclaimed.
Acquiring or creating a capital asset
If you acquire or create an expensive capital asset you may have to use the Capital Goods Scheme to adjust how much input tax you initially reclaimed in future years. The scheme applies when your capital spending, net of VAT is:
- £250,000 or more on land or buildings, or on building or civil engineering works
- £50,000 or more on a single computer or piece of computer equipment
- £50,000 or more on an aircraft, ship, boat or other vessel
You’ll have to adjust the amount of VAT you reclaimed if your business has an asset, and the extent to which you use it to make taxable supplies (rather than exempt supplies) varies over the following 5 or 10 years (depending on the asset).
You can reclaim more if the proportion of your taxable supplies increases, but you’ll have to repay some if it decreases.