VAT Exemptions: What Qualifies and What Doesn’t

VAT is an essential part of the global economy. It is used by many countries to raise government revenue with a stable income stream. In fact, it has significantly helped the more than 160 countries that currently have imposed VAT.

Basics of VAT Exemption

While standard VAT is 20% on most goods and services, there is a reduced rate of 5% on some goods and services. There are also zero-rated goods and services, some of which are completely exempt from VAT. Zero-rated is not the same as exempt, but in both cases, VAT is not applied and cannot be claimed back.

Regarding items or services exempt from VAT, you can’t claim the VAT back on these items when you have purchased them on behalf of your business, and if you are a company that provides VAT- exempt services and products, you can’t register for VAT.

Some very clear benefits of VAT exemption include:

• It can reduce costs for businesses and consumers
• It can increase demand for certain goods and services
• It can simplify taxes

Exempted Goods and Services

Several services are entirely exempt from VAT. These include:

• Insurance
• Finance
• Credit
• Education
• Training
• Charity fundraising
• Membership subscriptions
• The selling, leasing, and letting of commercial buildings and land
• Some sporting activities
• Some medical treatments

Partial Exemption

A partial VAT exemption is applied to a business that sells or provides goods and services that are both VAT exempt and taxable. This means that some of the products and services they provide will incur a VAT charge while others will not. While the tax authority has a very detailed and somewhat complex breakdown of VAT exemption and how this is applied, the simple upshot is that if you are VAT registered and sell both types of product or service, you can reclaim VAT on items used to create the VAT exempt services and goods.

To manage a partially exempt VAT business, you will need to keep meticulous records to ensure you track all items that are relevant to both VAT and VAT exempt expenses.

Common Products and Services Exempt from VAT

The list below is not exhaustive, but it is a fairly comprehensive breakdown of all the products and services listed by the HMRC exempt from VAT.

• Betting and gaming that includes games of chance and pool betting
• Bingo, both physical games and online, on the phone, television or radio
• Lottery tickets
• Online lottery tickets
• Retailer commissions on lottery ticket sales
• Admission charges by some public sector companies or cultural organisations such as art exhibitions or zoos
• Antiques that are sold privately to public collections or used to settle a tax or estate duty debt
• Garages or parking spaces
• Houseboat moorings
• Postal services provided by Royal Mail, such as first or second class services
• Financial services, credit, loans, and management of these loans or credit
• Insurance and a variety of insurance services

You can find a complete list of all VAT exempt services and products here. 

Food and Children’s clothing

Food and children’s clothing are usually zero-rated for VAT, or they are subject to the full VAT charge of 20%.

Health and Education services

There is a relatively extensive list of health services exempt from VAT. The following covers the primary health items that are free from VAT.

Education services and goods are also subject to VAT exempt rules. The following list includes all the items that are VAT exempt within this category:

• Health services provided by registered doctors, dentists, opticians, pharmacists, and health professionals
• Medical treatment at certain institutions, such as hospitals or nursing homes
• Education and training provided by certain colleges, schools or universities
• Physical education and sporting activities

Charity and Non-profit organization activities

There are quite a few activities that are VAT exempt for charities. Charity admission charges, advertising services, sponsored charitable events, and fundraising events are all VAT exempt.

However, if a charity earns over the VAT threshold, it will need to register for VAT and charge it on any services or products it provides. If the charity doesn’t sell anything taxable, then it shouldn’t register for VAT. Those charities that fall into the latter camp sell only VAT exempt goods or provide only VAT exempt services and do not participate in business activities.

How VAT Exemptions Affect Businesses

Follow this checklist to find out how VAT exemptions can affect different areas of your business.

Impact on profit margins

There are quite a few factors that can affect how being VAT exempt can influence a company’s profit margins by raising revenue, however these tend to differ from business to business and how these VAT exemptions are applied within the value chain.

For example, a company can positively impact its profit margin if it uses VAT-exempt goods and services in the middle of the value chain. While multiple factors will ultimately influence how a company can benefit from increased revenue due to VAT exemptions, the final impact of VAT exemptions on profit margins depends entirely on where the VAT-exempt products and services sit within the entire development process.

Impact on pricing strategies

If you are working out how much to charge for certain products and services, you will want to know how certain VAT exemptions will affect your pricing and, therefore your profits. You may find that you can adapt your pricing to take advantage of VAT exemptions or increase the competitiveness of your products, as you can come in at a lower price. Staying ahead of changing VAT exemptions is important to ensure you can adapt your pricing strategies.

Obligations under VAT Exemptions

When your company is liable for VAT exemptions, you are obligated to track those sales and purchases and to keep a meticulous record for the tax authority. You will need to ensure that the VAT you pay or charge reflects these exemptions and that you remain compliant with the basic requirements of VAT as outlined by HMRC.

Mistakes to Avoid with VAT Exemptions

There are several mistakes that you will need to actively avoid with VAT exemptions, here are two of the most critical ones and a few of the most important ones:

1. Not checking the correct VAT rates on each and every transaction: It’s important to verify that the correct VAT is being applied to every transaction. For example, if you have a repeat invoice or transaction and don’t check that you have applied any VAT exemptions or VAT rates correctly, you can end up making the same mistake over and over again, which will affect your business and your cash flow.
2. Not double-checking your VAT charges: Check you VAT charges once for the correct amount, and check them again after you’ve filed just in case. That way you can quickly fix an error before it becomes a problem with the tax authority. 

Conclusion: The Role of VAT Exemptions

VAT exemptions are designed to benefit certain sectors and services and allow companies to better manage their pricing and their sales as a result. The tax authority can change which items are VAT exempt from time to time based on need or specific circumstances. For example, VAT exemptions were put in place during the pandemic to support certain sectors such as food providers during that difficult time. Companies need to stay ahead of the rules and these changing exemptions to best benefit in terms of pricing and ensure that they always file their VAT returns correctly.

Blue dot has created a series of articles and interviews designed to help companies get a handle on their VAT and expenses. Visit our blog to find out more about how to reclaim and manage your VAT, or read our in-depth guide to VAT registration to determine if your company is ready to embark on the VAT road today.