VAT on purchases is a cost most businesses which sell goods or services will incur.
Businesses may use these taxable purchases produce and sell goods or services. In this instance, the sales are all exempt from VAT and can include: -
· Insurance, finance and credit
· Education and training
· Charitable events
· Subscriptions to membership organisations
Selling, leasing, and letting of commercial land is also categorised within the exempt goods and services. But, by using an option known as ‘opting to tax land and buildings’ you can charge VAT at the standard rate and waive the exemption.
A business selling solely those exempt goods and services are classed as an exempt business and cannot register for VAT. This also means that VAT incurred on purchases cannot be reclaimed.
There is another term often asked about when discussing VAT exemption. ‘Zero-rated supplies’ are taxable for VAT at 0%. These are similar to exempt goods and services due to both not adding VAT to the selling price. However, due to zero-rated supplies being taxable, albeit amounting to nothing, the business selling zero-rated goods and services can recover any VAT incurred on costs which relate to those sales.
In a situation where the majority of sales a business makes are zero-rated or all sales are zero-rated, it may request exemption from VAT registration and eliminate the possibility of reclaiming VAT.
On the other hand, a business that incurs VAT on costs relating to goods and services of which some are taxable and others are exempt will be classed as partly exempt. This business is able to register for VAT.
There are ‘de minimis’ rules a partly exempt business must consider when determining whether the VAT they incur on purchases is reclaimable.
When analysing the VAT on purchases relating to exempt supplies, if the figure for the month is less than £625 then the business may deem this tax recoverable. Although, they will also need to take into account whether the calculations amount to more or less than 50% of the total input tax over the VAT period. If less, the VAT can be reclaimed. In contrast, if more, then input tax is irrecoverable.