For most businesses operating in the UK, you will be required to pay Value Added Tax (VAT) on any goods or services you sell.
However, VAT does not apply to everything.
Certain products and services are exempt from VAT, meaning that your business won’t need to pay. However, if your business is VAT exempt, you cannot reclaim VAT on any business purchases.
What do you not pay VAT on?
There are a variety of goods and services that are exempt from VAT and not taxable. Some examples include:
- Insurance, finance and credit
- Education and training
- Fundraising events by charities
- Subscriptions to membership organisations
- Selling, leasing, and letting of commercial property – this exemption can be waived
You also do not pay VAT on zero-rated goods or services; however, these are not the same as being VAT exempt.
Goods and services that are zero-rated are taxable by VAT but at a rate of zero per cent.
This may initially sound confusing, however, this differentiation is related to reclaiming VAT on business expenses.
Exempt businesses:
If you only sell or supply VAT exempt goods and services, then your business is exempt. This means that:
- You cannot register for VAT
- You cannot recover any VAT from purchases or expenses
However, your business is not automatically exempt from VAT if you are selling or supplying zero-rated goods and services.
You can apply for a VAT exemption if your business only or mainly sells zero-rated items, but doing so means you are unable to reclaim any VAT from purchases related to your sales.
Partly exempt business:
Some businesses can be partly VAT exempt. This happens when you incur VAT on purchases that relate to exempt supplies.
In most cases, you are unable to reclaim exempt input tax. However, it can be recovered in full if it is below a certain threshold.
If your business supplies both taxable and exempt supplies, it is vital to keep a separate record of your exempt sales. This allows you to show how you have worked out the amount of VAT you want to reclaim.
Ensuring you follow regulations when it comes to VAT is vital to avoid penalties.
If you are unsure of whether your business is VAT exempt, it is best to talk to an accountant.
Get in touch with one of our experts today for help and advice with VAT for your business.
