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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

There are some goods and services on which VAT is not charged, including:

  • 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

These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes. And if you buy exempt items, there is no VAT to reclaim.

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%.

Exempt business

If you only sell or otherwise supply goods or services that are exempt from VAT then yours is an exempt business and:

  • you cannot register for VAT
  • you cannot recover any VAT you incur on your purchases or expenses

This is in contrast to where you sell or otherwise supply zero-rated goods or services. Here you can reclaim the VAT on any purchases that relate to those sales.

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

Partly exempt business

Your business is partly exempt if your business has incurred VAT on purchases that relate to exempt supplies. This is known as exempt input tax.

Generally, you will not be able to reclaim exempt input tax. However, provided the amount of exempt input tax is below a certain amount, it can be recovered in full.

Non-business use in a partly exempt business

You cannot reclaim the VAT you pay on goods and services that are not for business purposes.

If your business is partly exempt and you buy goods or services that you use partly for business and partly for non-business purposes you must split the VAT accordingly. You then use your partial exemption method to work out how much of the business VAT you can reclaim.

Keeping records if your business is partly exempt

If you make both taxable and exempt supplies, you must keep a separate record of your exempt sales and details of how you’ve worked out how much 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 known as opting to tax land and buildings. VAT incurred in making taxable supplies can be reclaimed.

Acquiring or creating a capital asset

If you acquire or create an expensive capital asset you may have to use the Capital Goods Scheme to adjust how much input tax you initially reclaimed in future years. The scheme applies when your capital spending, net of VAT is:

  • £250,000 or more on land or buildings, or on 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 another vessel

You’ll have to adjust the amount of VAT you reclaimed if your business has an asset, and the extent to which you use it to make taxable supplies (rather than exempt supplies) varies over the following 5 or 10 years (depending on the asset).

You can reclaim more if the proportion of your taxable supplies increases, but you’ll have to repay some if it decreases.

If you move your goods from Great Britain to Northern Ireland

If you move your goods from Great Britain (England, Scotland, and Wales) to Northern Ireland, you will usually be able to recover the full amount of VAT as if it had been a taxable supply.

However, if you make supplies that are exempt from VAT you may not be able to recover some or all of the VAT on goods when they are first purchased. If you then move the goods from Great Britain to Northern Ireland you will incur a VAT charge.

You may also be further restricted in what input tax you can recover. For example, if you are making exempt supplies. This will mean that you have incurred an input tax restriction twice on the same goods.

To prevent this, you should reattribute the previously unrecovered input VAT on the original purchase in Great Britain as if the goods had been used for a taxable purchase. You can do this when making your annual adjustment.

How to recover VAT on exempt supplies moved to Northern Ireland

For example, if you purchase goods that are valued at £10,000 plus VAT of £2,000. Because you are making exempt supplies, only £1,000 of the VAT is recoverable.

If you then move the goods to Northern Ireland you will be charged a VAT of £2,000. The partial exemption calculation at that time only permits £900 to be recovered.

This would mean you have paid £4,000 VAT and only claimed £1,900 as input tax.

To remedy this, you should treat the movement as if it were a fully taxable supply. This will allow you to recover the originally restricted input tax as being fully attributable to that taxable supply.

You can do this as part of your annual adjustment. The VAT may be reclaimed subject to the normal rules.

Hope the above helps when you come across a similar situation.

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