Exemption and Partial Exemption from VAT

Some goods and services are exempt from VAT. If all the goods and services you sell are exempt, your business is exempt and you will not be able to register for VAT. This means you cannot reclaim any VAT on your business purchases or expenses.

If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.

Exempt Goods and Services

Some goods and services on which VAT is not charged include:

• Insurance, finance, and credit

• Education and training

• Fundraising events by charities

• Subscriptions to membership organizations

• Selling, leasing, and letting of commercial land and buildings - this exemption can be waived

Key points:

• Exempt items are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes.

• If you buy exempt items, there is no VAT to reclaim.

Note: Exempt items are different from zero-rated supplies. In both cases, VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT at 0%, and VAT on related purchases can be reclaimed.

Exempt Businesses

If you only sell or supply goods or services that are exempt from VAT:

• You cannot register for VAT

• You cannot recover any VAT on your purchases or expenses

In contrast, businesses that sell zero-rated goods or services can reclaim VAT on purchases related to those sales.

If you sell mainly or only zero-rated items, you can apply for an exemption from VAT registration. If exempt from registration, you will not be able to reclaim VAT.

Partly Exempt Businesses

A business is partly exempt if it incurs VAT on purchases related to exempt supplies. This is known as exempt input tax.

• Generally, you cannot reclaim exempt input tax, unless it is below a certain threshold, in which case it may be recovered in full.

Non-Business Use

• You cannot reclaim VAT on goods and services not used for business purposes.

• If goods or services are used partly for business and partly for non-business purposes, you must split the VAT accordingly.

• Use your partial exemption method to calculate how much VAT can be reclaimed for business use.

Record-Keeping

• If you make both taxable and exempt supplies, keep a separate record of:

  • Exempt sales

  • How you calculated VAT to reclaim

Land and Buildings

• If you sell, lease, or let commercial land or property, you can choose to waive the exemption and charge VAT at the standard rate. This is called opting to tax.

• VAT incurred in making taxable supplies can be reclaimed.

Acquiring or Creating a Capital Asset

If you acquire or create a capital asset, the Capital Goods Scheme may apply if your net capital spending (excluding VAT) is:

• £250,000 or more on land, buildings, or construction 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

You’ll need to adjust the VAT you reclaimed if the use of the asset for taxable supplies changes over the following 5–10 years. More VAT can be reclaimed if taxable use increases; repayment is needed if it decreases.

Moving Goods from Great Britain to Northern Ireland

• Normally, you can recover the full VAT as if it were a taxable supply.

• If you make exempt supplies, some VAT may not be recoverable.

• You may face input tax restrictions twice: on purchase in GB and when moved to NI.

How to Recover VAT on Exempt Supplies Moved to NI

Example:

1. Purchase goods for £10,000 + VAT £2,000

2. Making exempt supplies → only £1,000 VAT recoverable

3. Move goods to NI → VAT charge £2,000; partial exemption allows only £900 to be reclaimed

Solution: Treat the movement as a fully taxable supply. This allows you to recover previously restricted VAT during your annual adjustment.

Key Takeaways

• Exempt goods and services cannot recover VAT; zero-rated goods can.

• Partly exempt businesses must split VAT and keep records.

• Land, buildings, and capital assets may require special rules.

• Moving goods to Northern Ireland requires careful partial exemption adjustments.