Value-added tax or VAT is a tax on goods, services and other taxable supplies. It plays a crucial role in business as it can be charged on a range of the products or services you offer.
However, some goods, services and companies are exempt from VAT. To help you understand VAT exemption, this guide will cover:
- Items that are exempt from VAT
- Rules that apply to exempt products or services
- How VAT exempt businesses operate
- VAT exemption work for charities
- VAT exemption for capital assets
Items that are exempt from VAT
Most goods and services are subject to the standard VAT rate of 20%. However, some products or services are taxed at a reduced rate (5%), zero rate (0%) or exempt from VAT altogether.
If items are exempt from VAT, it’s usually because they’re considered an essential product or service. Some goods and services that are exempt from VAT include:
- Sporting activities and physical education
- Training and education
- Some medical treatments
- Financial services, investments or insurance
- Food and drink (except alcohol, which is subject to the standard 20% rate)
Companies should not include VAT in the price of any exempt items they sell and also can’t reclaim VAT on any exempt items they purchase. Sales of VAT-exempt goods or services also don’t count towards your VAT taxable turnover, meaning you don’t need to keep VAT records for these items.
However, VAT exemption is not the same as zero-rate (0%) VAT. Zero-rated items have no extra charge added to them but count as VAT-taxable. As such, these sales are considered part of your VAT-taxable turnover, whereas VAT-exempt items are not.
This means you still have to include VAT on their receipts and invoices and declare the sales to HMRC. VAT-exempted sales only need to be recorded in your regular company accounts and not in the VAT return due to HMRC.
What about VAT exemption for businesses?
Businesses are not required to register for VAT if they only supply goods or services that are exempt from VAT or if their annual turnover doesn’t exceed £85,000.
You also don’t need to keep VAT records or file VAT returns to HMRC, if not required to register.
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 companies that sell both VAT-taxable and VAT-exempt goods or services.
You can’t reclaim VAT on goods and services you buy for non-business purposes. If you purchase something that you use partly for business use and partly for private purposes, you must split the VAT accordingly. HMRC has a partial exemption method you can use to work out how much of the business’ VAT you can reclaim.
When buying a combination of VAT-taxable and exempt items, you must also keep a separate record of your exempt sales, including details of how you worked out how much VAT to reclaim.
How does VAT exemption for charities work?
Charities are not VAT-exempt by nature and must register for VAT with HMRC just like any other business.
Once registered, charities can charge VAT on products and services and will need to submit a VAT return to HMRC, usually on a quarterly basis. The government’s online VAT calculator can help you work out how much you should charge.
Like any other business, even if a charity’s VAT taxable sales are below £85,000, they can choose to register for VAT voluntarily, which may open up possibilities to be able to reclaim input VAT incurred on their business expenses.
VAT exemption vs VAT relief for charities
Even exempt charities need to pay VAT on any taxable products or services they purchase from VAT-registered companies.
However, charities in the UK are eligible for VAT relief on certain goods and services from VAT-registered companies. This allows them to pay the reduced or zero rate on those purchases.
VAT relief applies to VAT or non-VAT-registered charities and charities that qualify for VAT exemption. However, VAT relief does not apply to non-charitable businesses.
What are the rules for acquiring or creating a capital asset?
A capital asset is a valuable item you own that you can sell quickly for cash. (You can learn more about assets in this guide.)
As a sole trader or small business owner, you may not have acquired or created any expensive capital assets yet. However, if at some point you get or make a capital asset, you still need to know about the following:
If you want to reclaim VAT on your capital asset, you may need to use the Capital Goods Scheme. You may have to adjust the amount of VAT you reclaim from HMRC.
The scheme applies when your capital spending (what you paid for the asset) is:
- £250,000 or more on land or buildings, 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
If you use your asset to make VAT-taxable supplies, you can reclaim all the VAT you paid when buying the asset. However, if you only partially use your capital asset for VATable goods, you can only reclaim that proportion.
VAT can quickly get complicated, so it may be wise to hire an accounting professional to manage your VAT taxes for you. If you set up a business current account with Countingup, we offer a designated accountant hub that helps your accountant keep track of your finances efficiently.
Simplify your tax management with Countingup
When you sign up for a Countingup business current account, you get free built-in accounting software that allows you and your accountant to keep track of your books with ease.
We’ve automated the time-consuming aspects of bookkeeping and tax planning, so you can focus on running your business. You also receive updates about profit and loss statements, cash flow insights, tax estimates and unpaid invoices.
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