VAT exempt refers to goods and services on which no VAT is charged and for which the supplier cannot reclaim VAT incurred on related purchases. Businesses making only exempt supplies generally cannot register for VAT.
What does VAT exempt mean?
VAT exempt refers to certain goods and services on which no VAT is charged. When a sale is VAT exempt, you do not add VAT to the price and you cannot reclaim VAT on the related purchases used to make that supply.
This is different from zero-rated supplies. Zero-rated items are still technically taxable (at 0%), so you can usually reclaim input VAT on associated costs. Exempt supplies are not taxable at all, which affects both your charging and your reclaim position.
Common examples of VAT exempt supplies
Some of the most common categories where you may encounter exempt treatment include:
- Most insurance and financial services
- Certain education and training services
- Some health and welfare services provided by qualifying professionals
- Residential property rental income (relevant for many landlords)
- Postal services provided by the universal service provider
- Certain fundraising events by charities
Heads up - The rules for exempt supplies can be nuanced, and the same activity may be treated differently depending on who provides it and the specific circumstances. Always check the latest HMRC guidance or speak with your accountant if you are unsure.
How exempt supplies appear on your VAT return
Exempt sales are included in the total value of sales (box 6 of the VAT return) but do not contribute to the VAT due. Exempt purchases are similarly reflected in total purchases (box 7) without adding to the VAT you can reclaim. Tax Optimiser is bridging software: you map the cells of your spreadsheet once, upload the spreadsheet each period, check the nine boxes and send the return. Exempt sales and purchases are recorded in your own spreadsheet or accounting system, so they must already be in your box 6 and box 7 totals when you upload it. See Map your spreadsheet in VAT Settings.
Partial exemption considerations
If your business makes both taxable and exempt supplies, you are considered partially exempt. This affects how much input VAT you can reclaim on costs that relate to both types of activity.
Typical scenarios include:
- A landlord renting out both residential (exempt) and commercial (taxable) property
- A business offering both consultancy (taxable) and qualifying training (exempt)
- A practice combining standard professional services with exempt healthcare
In Tax Optimiser the nine boxes are read from your spreadsheet, so the partial exemption calculation is made in your own records: the box 4 figure in the spreadsheet you upload should include only the input VAT you can recover.
Heads up - Partial exemption calculations can be complex, and small errors can compound across periods. If you are new to partial exemption, consider reviewing your method with an accountant before finalising your first return under this approach.
Exempt supplies and VAT registration
Exempt income does not count towards the VAT registration threshold, because the threshold is measured on taxable turnover and exempt supplies are not taxable. If your only income is from exempt activities, you generally cannot register for VAT, which means you cannot reclaim VAT on your costs.
If you have a mix of taxable and exempt income, only the taxable turnover is assessed against the threshold.
Common mistakes to avoid
- Treating exempt as zero-rated - the VAT treatment looks similar on an invoice but the reclaim implications are very different.
- Reclaiming input VAT on costs linked to exempt sales - this is not permitted and may need correcting.
- Ignoring partial exemption - if you make any exempt supplies alongside taxable ones, you must consider how to apportion shared costs.
- Misclassifying property income - residential and commercial lets often have different VAT treatments, so set them up correctly from the start.
Getting further help
If you need to confirm whether a specific supply is exempt, refer to HMRC's published guidance or consult a qualified accountant. For help sending your VAT return with Tax Optimiser, see Upload your VAT figures and Send your return and keep the receipt, or email support@taxoptimiser.co.uk. Related glossary entries: Zero-rated and VAT.
