What does VAT exempt mean?
VAT exempt goods and services are outside the VAT charge altogether, so no VAT is added to the price and the seller usually cannot reclaim VAT on related costs.
What VAT exempt means
UK supplies fall into a few groups for VAT: standard rated at 20%, reduced rated at 5%, zero rated at 0%, exempt, and outside the scope of VAT. Exempt supplies are those the law says should not be taxed, usually for social reasons.
Common examples include most insurance and financial services, most medical and dental care by registered professionals, education by eligible bodies, postal services by the universal provider, the sale or rental of most residential property, and many services by charities and membership bodies.
Exempt vs zero-rated
Both mean no VAT on the sale, but the effect on the business is very different.
- Zero-rated sales, such as most food, children's clothes and books, are taxable at 0%. They count towards the VAT registration threshold, and a registered business can reclaim VAT on its costs.
- Exempt sales are not taxable. They do not count towards the threshold, and VAT on costs used to make them cannot be reclaimed.
Example
Two businesses each spend £12,000 plus £2,400 VAT fitting out new premises.
| Business | Sales type | Can reclaim £2,400? | Real cost |
|---|---|---|---|
| Bookshop | Zero-rated | Yes | £12,000 |
| Private dental practice | Exempt | No | £14,400 |
The dental practice cannot register for VAT on its exempt treatments, so the VAT on its costs is a real expense. If it also sold cosmetic treatments, which are standard rated, it would need to look at partial exemption.
Why it matters for your business
Getting the category right affects your prices, your registration and your costs. Businesses that mix exempt and taxable sales, such as a dentist offering cosmetic whitening or a landlord letting both commercial and residential property, are partly exempt. They can only reclaim VAT that relates to taxable sales, under partial exemption rules, unless the exempt input tax is small enough to fall within the de minimis limits.
Some exemptions can be waived. Owners of commercial property can opt to tax, making rents standard rated so VAT on the building can be reclaimed.
Exempt vs outside the scope
Some income is neither exempt nor taxable but outside the scope of VAT altogether, such as wages, statutory fees, most grants and many services supplied to overseas business customers. It does not appear on the VAT return in the same way. Classifying income correctly matters because it affects your threshold and how much VAT on costs you can recover.
Common questions
No. Only taxable sales, including zero-rated ones, count towards the £90,000 registration threshold. A business that only makes exempt supplies cannot register for VAT at all, and so cannot reclaim the VAT it pays on its costs.
Not on costs used to make exempt sales. If you also make taxable sales, you can reclaim the VAT that relates to those, and some exempt VAT may be recoverable if it falls under the partial exemption de minimis limits.