Exemption And Partial Exemption From VAT Explained

Getting to grips with Value Added Tax (VAT) can be difficult. There are three rates (20%, 5% and 0%) and it isn’t immediately obvious which goods or services are charged at these rates – not to mention the services that have either exemption from VAT or partial exemption.

To help further explain exemption status, we’ve provided a guide on what is fully and partially exempt when dealing with VAT.

Exempt goods and services

Anyone can register for VAT (including sole traders) provided that not everything they sell is exempt, but there are still certain services that are entirely exempt from VAT. These services vary from lottery tickets to funeral costs,

Some examples of services or goods with exempt VAT status include:

  • Financial and credit services
  • Insurance
  • Education and training
  • Charity fundraising
  • Certain types of land and building
  • EU exports, although this may change depending on any Brexit deal agreed or otherwise with the EU.

Again, businesses that only supply exempt goods and services are subsequently entirely exempt themselves. As a result, they will not be able to recover any VAT expenditure incurred on purchases or expenses made for business purposes.

It’s also worth noting that there are businesses which are zero-rated. These companies and services aren’t to be confused with totally exempt businesses. Zero-rated means affected organisations won’t charge customers VAT but will be free to report (and claim for) said purchases on their VAT return.

Examples of the goods that zero-rated companies provide include:

  • Newspapers
  • Protective and safety clothing
  • Animals and animal feed
  • Plants and seeds

Partial Exemption

Your business can even have partial exemption from VAT if supply some goods and services that are chargeable to VAT and also some that are exempt from VAT. For example, when an optometrist sells a pair orfspectacles the lenses and frames are subject to VAT but the eye test costs are exempt from VAT.

There are two specific methods by which partly exempt businesses and services can calculate their VAT for submission to HMRC. One is determined in the law and designed to support smaller organisations, whereby you determine a recoverable percentage of residual input tax using the Standard Method Calculation (VAT Notice 706) 

The second method is more unique and tailor-made to your processes, however, you won’t be able to apply this method unless you obtain prior approval from HMRC.

Furthermore, if you are making both taxable and exempt supplies, you need to keep a separate record of all exempt sales.

Land and buildings

Selling, leasing and letting commercial property or land also affects your VAT. While having exempt land and buildings can be a positive, some individuals choose to waive the exemption – otherwise known as opting to tax land and buildings – and charge VAT at the standard rate. The benefit of creating a capital asset is that all VAT incurred in making taxable supplies can be reclaimed.

Once you acquire or create an expensive capital asset, you may need to use the Capital Goods Scheme and adjust at a later stage how much input tax you reclaim. This scheme can also be applied to computers and ships where the individual costs are greater than £50,000 (excluding vat), but regardless of the asset, provided it’s only being used for making taxable supplies, you can recover all paid VAT.

Get the most from VAT with GoSimpleTax

As you can see, there are various forms of exemption from VAT and it’s easy to get tangled up in what you can and can’t claim back. For individuals hoping to optimise their processes and potentially increase their bottom line, it’s never been so important to familiarise yourself with VAT legislation.

For all your VAT return needs, choose GoSimpleVAT. Our bridging software links to your HMRC account in order to transfer your VAT information directly. In this way, you comply with Making Tax Digital (MTD) for VAT and can either continue to use your existing spreadsheet process or non-MTD-compatible software for your VAT records.

What’s more, our service is on HMRC’s recognised list of suppliers, so ahead of your next digital submission you can rest easy in the knowledge that you’re MTD-compliant.

To find out more about how GoSimpleVAT can support your business in reclaiming VAT, speak to a member of our team today.

Last updated on 2nd October 2019.

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