It’s essential to stay on top of your company’s VAT requirements. This requires sound knowledge of the rules and what authorities expect of businesses. This includes dealing with supplies of goods and services outside standard VAT obligations.
Not every product or service incurs VAT. This is VAT exemption.
VAT exempt supplies of goods and services – what are they?
Some goods and services are exempt from VAT. This depends on the sector and country you are selling within.
If a supply is exempt from VAT, it may be because the EU considers the goods or services as essential. VAT exempt supplies include:
- Education and training
- Insurance, finance and credit
- Fundraising events by charities
- Medical treatments provided by hospitals
- Subscriptions to membership organisations
- Selling, leasing and letting of commercial land and buildings — though authorities can waive this exemption
VAT exempt businesses
If your company only sells VAT exempt products or services, your business operates differently. It is a VAT exempt business and:
- Cannot register for VAT
- Does not need to keep VAT records
- Does not need to submit VAT Returns
- Cannot account for VAT on supplies
- Cannot reclaim VAT on any business expenses – even if you purchase taxable items and pay VAT
For example, if a company solely provides education and training services in the UK, the government would consider it an exempt business. The above rules would apply.
Partly exempt businesses
In some circumstances, a business might be partially exempt from VAT. Partial VAT exemption applies to VAT-registered companies that carry out both taxable and VAT exempt supplies of goods or services.
If your business is partially exempt from VAT, you can still reclaim any VAT incurred when producing or acquiring non-VAT exempt goods or services you sell to customers.
Additionally, partially exempt businesses need to keep separate records. These records should cover VAT-exempt sales and provide details on how VAT was calculated for reclamations.
What is the difference between VAT exemption and 0% VAT?
VAT exemption is not the same as 0% VAT. No extra charges are added to the original sales price for either zero-rated or VAT-exempt supplies, but there are a few significant differences.
Unlike VAT-exempt supplies, zero-rated goods and services are part of your taxable turnover. Zero-rated supplies should be recorded in your VAT accounts – whereas, in some countries, businesses might only record non-taxable sales in regular company accounts.
Furthermore, in contrast to VAT exemption, you can reclaim the VAT on any purchases for zero-rated goods or services.
VAT rates on different goods and services
VAT rates and exemptions vary across the world, so we will use the UK as an example to illustrate the concept.
In the UK, most goods and services are subject to a standard VAT rate of 20%. However, some are subject to a reduced VAT rate of 5% or 0%.
Goods and supplies with a VAT rate of 5% include:
- Children’s car seats
- Mobility aids for the elderly
- Electricity for domestic/residential use
- Smoking cessation products (nicotine patches and gum)
Goods and supplies with a VAT rate of 0% include:
- Children’s clothes
- Water supplied to households
- Aircraft repair and maintenance
VAT rates conditions
These reduced rates may only apply to certain conditions, or in particular circumstances depending on the following:
- Where a company provides the goods or services
- How a company presents the goods or services for sale
- Who’s providing or buying the goods or services
- The precise nature of the goods or services
- Whether a company keeps the correct records
- Whether a company obtains the appropriate evidence
- Whether a company also provides other goods or services
Continuing with our UK example, if you sell, send or transfer goods out of the UK, UK VAT is often not included as they are considered an export.
You can send most exports to a destination outside the UK with a zero rating if you meet the necessary conditions:
- Your company has proof (either official or commercial) it is entitled to a zero rating
- Your company has supplementary evidence (e.g. customer’s order and inter-company correspondence)
- Your company physically exports the goods from the UK within three months of the sale
VAT exemptions are always changing. Don’t get caught out. Contact our team for advice on how your business should manage its VAT obligations if it is exempt from VAT.