How Do I Apply for a VAT Exemption?

VAT can be a tricky subject to get your head around because whilst many businesses need to register for VAT when they reach the threshold, others may be exempt. In this article we’ll discuss what makes your business fully or partially exempt from VAT, and how you can apply for an exemption.

What is VAT?

VAT (which stands for Value Added Tax) is a consumption tax added by VAT-registered businesses onto goods and services that are eligible. The rate of VAT you need to charge on your sales depends on what you sell (or what type of service you provide).

VAT-registered businesses must report the VAT they collect on sales by submitting a VAT Return. If the amount collected is higher than the amount paid on purchases over the same period of time, the business will pay the difference to HMRC. If the total amount paid out is higher than the VAT collected, the business can reclaim the difference.

What is VAT exemption?

A VAT exemption is where no VAT is charged at all – but it’s important to note VAT exemption and zero-rated VAT are not the same. You’ll find most VAT exempt goods or services are essential items the government want to ensure are affordable.

If everything you sell is exempt, then your business is exempt too. It means you won’t need to become registered, but it also means you can’t register voluntarily, even if you want to .

Some businesses choose voluntary VAT registration because it helps them be more tax efficient, but if you’re a business that’s exempt from VAT then you won’t have this option and you won’t be able to reclaim any VAT you’ve paid on any purchases.

What kinds of things are exempt from VAT?

Goods and services fully exempt from VAT include:

Education and training (schools, colleges, universities)
Charity donations and events
Health and medical services
Financial and insurance services
Royal Mail postal services
Sports, leisure, and cultural activities

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What is zero-rated VAT?

Zero-rated VAT is exactly how it sounds; goods or services eligible for this category are subject to VAT, but the VAT is charged at a rate of 0%. So even though there isn’t anything being added, businesses can still register for VAT and reclaim back any VAT they’ve paid on expenses.

Examples of things that are zero-rated include:

Most food and non-alcoholic drinks
Children’s clothes and shoes
Books, newspapers, and magazines (including digital)
Medicines and first aid supplies
Passenger transport (bus, train, or boat in the UK)
Domestic fuel and power

VAT exempt versus zero-rated VAT – at a glance

It’s important to understand the difference between the two, because it affects whether you need to register for VAT, and if you can reclaim VAT back on any expenses.

VAT exempt: This is out of the VAT system, which means it isn’t reported at all. VAT can’t be charged or reclaimed on these goods or services. If you only sell VAT-exempt goods, you’re exempt from VAT registration (and you can’t register, even if you’d like to).
Zero-rated VAT: These are in the tax system, taxable at a 0% VAT rate. So, whilst VAT isn’t charged, it’s still reported, and you can still reclaim VAT back on expenses.

What businesses are exempt from VAT?

In a nutshell, if you only sell goods or services that are exempt, you don’t need to register for VAT. This includes sectors such as:

Healthcare providers
Educational institutions
Financial or insurance companies

If you’re ever unsure, make sure to speak to an accountant!

What if I sell both exempt and taxable goods or services?

If you sell both taxable and exempt items, and your turnover is over the VAT threshold, you’re classed as partially exempt and will need to register for VAT. This means you can reclaim VAT back on purchases that relate to:

Taxable supplies you make in the UK
Supplies made outside of the UK (that would be taxable if made in the UK)
Certain exempt supplies that are allowed by Treasury

This is known as ‘taxable input tax’. You can’t recover input tax on things like exempt supplies, or supplies outside of the UK that would be exempt if supplied in the UK. This is known as ‘exempt input tax’.

If your purchases relate to both taxable and exempt supplies, you can only reclaim a proportion of the VAT you paid.

Can I apply for an exemption if I only sell zero-rated VAT goods or services?

Yes – if you mainly sell zero-rated items you can apply for an exemption from VAT-registration, but it’s important to remember you can’t reclaim any VAT you’ve paid for supplies if you are approved for exemption.

Find out more about reclaiming VAT.