Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
VAT is something many UK businesses legally need to register for and collect, but some businesses may be exempt, meaning they don’t have to pay the levy, nor can they claim it back.
Whilst the VAT rules can be complex, they shouldn’t fill you with fear. We’ve put together this simple guide explaining VAT exemption.
How VAT exemption works
UK businesses with a turnover of more than £85,000 must register for value-added tax (VAT) and collect it on the goods and services they sell on behalf of the government. The current tax rate is 20%. As a VAT-registered business you can claim back the duty on items you buy in the normal running of your business.
The tax is added at every stage in the supply chain, but there are some products and services the government considers exempt and completely outside its scope. If your business sells exempt products, you don’t pay VAT and you don’t charge your customers the levy either.
If you’re an exempt business you don’t have to register for VAT, but you can’t claim it back, even if you buy goods or services that you do pay it on.
What this means for your business:
You don’t include VAT in the price of any items for sale
You can’t reclaim VAT on exempt items you buy
Sales of exempt goods don’t count towards your VAT taxable turnover
No need to keep a record of exempt sales
Examples of exempt goods and services
Whether something is a VAT-exempt item or not can be complex, but HMRC has a comprehensive list of tax exempt products to help you. Usually, it applies to what the government considers essential services.
Some common examples of exempt items include financial services, sporting activities and physical education, some medical treatments, education and training, postal services, artwork and burial.
VAT exemption vs 0% VAT
Zero-rated VAT is not the same as exemption – these sales, although the rate is 0%, are still considered taxable. Therefore, they do contribute to your VAT taxable turnover and need to be recorded in your accounts. Examples of zero-rated goods include certain foods and beverages, children’s clothes, books, animal feed and export goods.
If you supply zero-rated goods you should register for VAT if you’re over the threshold, so you can reclaim it on any costs your business incurs in its day-to-day running e.g. stationery, computer supplies etc.
Frequently asked questions
Do you need a VAT exemption certificate?
Businesses don’t need an exemption certificate as such, but do keep comprehensive financial records in case HMRC audit you and your exemption status. You may need to fill out an exemption declaration when purchasing certain items. Also make sure your customer invoices contain the right information about your tax position.
What are VAT-exempt services?
These are services which are not subject to the tax and include charity fundraising events, insurance, finance and credit services, education and training, subscriptions to membership organisations and the selling, letting and leasing of commercial land and buildings (though this can be waived).
How does partial VAT exemption work?
If you supply exempt goods and services but you pay tax on some of the materials used to make them, and you’re VAT-registered, you’re considered partially exempt and can claim it back on those supplies. Similarly, if you purchase exempt raw materials to make a taxable product, you’re partially exempt. It’s your responsibility to keep records for both types and to make sure you’re paying the correct amount of tax on each.