VAT exemption – What is VAT exemption?
VAT exemption can refer to either goods and services that are not subject to VAT or to organisations that cannot register for VAT.
It's important for companies to make sure that their invoices contain the correct information about taxes and VAT – even if they're exempt. Find out more about invoice templates for VAT-exempt businesses.
When most products are sold, a sales tax known as VAT (or GST in some countries) is added to the product's original sales price; however, VAT should not be applied to certain goods or services. Products that should not be taxed are considered to be exempt from VAT.
Businesses, charities, and other types of organisations can also be considered to be exempt from VAT. A business is VAT-exempt if they only sell VAT-exempt products, or if they are not involved with taxable ‘business activities’.
VAT exemption for goods and services
Although most goods and services are taxed at 20% VAT, some products are taxed at a reduced VAT rate or are exempt from VAT altogether. If something is exempt from VAT, it is usually because the product is considered to be an essential good or service.
HMRC has full list of VAT-exempt products, but some of the main goods and services that are exempt from VAT include:
- Sporting activities and physical education
- Education and training
- Some medical treatments
- Financial services, insurance, and investments.
Goods and services that are exempt from VAT are not taxable. This means that:
- You should not include VAT in the price of any exempt items that you sell
- You cannot reclaim VAT on any exempt items that you purchase
- Sales of VAT-exempt products do not count towards your VAT taxable turnover
- You do not need to keep VAT records for VAT-exempt sales.
VAT exemption vs. 0% VAT
VAT exemption is not the same as 0% VAT. There is no extra charge added to the original sales price of either zero-rated or VAT-exempt products, but there are a few major differences.
Technically, zero-rated products are still taxable, whereas VAT-exempt products are not. This means that, unlike sales of VAT-exempt products, sales of zero-rated goods and services are considered part of your taxable turnover. Furthermore, sales of zero-rated products should be recorded in your VAT accounts, whereas non-taxable sales should only be recorded in your regular company accounts.
VAT exemption for businesses
If a business only supplies goods or services that are exempt from VAT, it is also considered to be exempt from VAT.
If a business is VAT-exempt, it cannot be registered for VAT. Like other businesses that are not registered for VAT, VAT-exempt companies:
- Cannot charge VAT on any sales they make
- Cannot reclaim VAT on any business expenses – even if you purchase taxable purchases and pay VAT
- Do not need to keep VAT records
- Do not need to submit VAT Returns.
VAT partial exemption for businesses
In some circumstances, a business might be considered to be partially exempt from VAT. Partial VAT exemption applies to VAT-registered businesses that are registered for VAT and sell both taxable and VAT-exempt goods or services.
If your business is partially exempt from VAT, you can reclaim any VAT that is incurred when producing or acquiring the VAT-exempt goods or services that you sell to customers.
Partially exempt businesses need to keep separate records for their VAT-exempt sales and provide details of how they calculated the VAT that they want to reclaim from HMRC.
VAT exemption for charities
Charities and non-profit organisations generally follow the same rules on VAT registration and VAT exemption as for-profit businesses and companies.
This means that charities with a taxable turnover above the VAT threshold must register for VAT, and that VAT-registered charities should charge VAT on any taxable goods and services that they sell.
This also means that charities that make no taxable sales are exempt and should not register for VAT. There are two main reasons why a charity would not have taxable sales:
1) The charity only sells VAT-exempt goods or services.
2) The charity is not considered to be involved with any ‘business activities’.
Examples of charity VAT exemption
A charity has runs a historical site as a tourist attraction. HMRC considers this to be a business activity. The charity has a taxable turnover of £300,000 a year, generated exclusively through the admission fees. The charity must therefore register for VAT and charge VAT on the entry price.
On the other hand, a charity provides sea-rescue services, which HMRC does not not consider to be business activities. The charity is not involved with any other business activities, so is exempt from VAT.
VAT exemption for charities vs. VAT relief for charities
VAT-exempt organisations still need to pay VAT on any taxable products they purchase from VAT-registered companies. However, in the UK, charities are eligible for VAT relief, which allows them to pay VAT at a reduced rate of 0 or 5% when they purchase certain taxable goods and services from companies that are registered for VAT.
VAT relief applies to charities that are registered for VAT, charities that are not registered for VAT, and charities that qualify for VAT exemption. It does not apply to for-profit organisations.