Everything you need to know about VAT exemption

There are two types of VAT (value-added tax) that businesses pay to the government:

• Businesses charge customers an extra fee for VAT. This money is then passed on to the government’s tax department (HMRC).

• Businesses pay their suppliers a VAT charge on top of the standard price. This is similarly passed on by the supplier to HMRC, but can be claimed back by the buyer when filling out tax returns. 

The standard rate for VAT is 20%, but some items have a reduced rate.

Some businesses, goods and services are exempt from paying VAT altogether. We’ll explain the parameters for VAT exemption here.

What goods are VAT-exempt?

Some items and services are considered necessary or beneficial, and are exempt from having to add additional charges for VAT. These include:

• Medical health services

• Education and training

• Burials and cremations

• Postal services

• Sporting activities

• Museums

• Financial services

• Insurance

If you only sell VAT-exempt goods or services, then you can’t register for VAT. This means you are a VAT-exempt business.

What does it mean to be exempt from paying VAT?

If you are VAT-exempt, it means that you don’t need to charge your customers VAT. You don’t have to keep VAT records or submit VAT returns to HMRC.

The drawback of being VAT-exempt is that you can’t reclaim VAT that you paid to suppliers back from the government.

What goods have 0% VAT?

“Zero-rated” items have a 0% VAT rate because they are considered critical in a supply chain or highly necessary. This makes them more affordable to buyers. 

Zero-rated goods and services include:

• International freight transport

• Books and magazines

• Children’s clothes

• Food and drink, with some exceptions

• Donated goods sold by charity shops

Zero-rated items sound just like tax-exempt items, but there’s a difference. Zero-rated items must be recorded in VAT accounts and reported in VAT returns.

If you only sold zero-rated items, you would still be able to claim back the VAT that you paid to suppliers. You would still be VAT-registered.

What is partial VAT exemption?

You can be considered a partially exempt business if you sell both taxable and VAT-exempt items.

This means you can reclaim any VAT that you paid to suppliers, even if these costs were incurred when producing the VAT-exempt items.

Partially exempt businesses need to keep separate records for their VAT-exempt sales and provide details of how they calculated any VAT they want to reclaim from HMRC.

What are reduced-rate items?

Some types of goods and services are set at a reduced rate of 5%.

Here are some examples of items that often have a reduced rate:

• Household energy, heating components and insulation

• Nicotine patches and gum

• Protective gear, such as helmets and children’s car seats

Selling reduced-rate items doesn’t in itself make you a partially exempt business. You are only a partially exempt business if you sell both taxable and exempt items. You are only a VAT-exempt business if you sell nothing but VAT-exempt items.

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Related article: What are the new EU VAT rules for online sellers?