Intuit QuickBooks Small Business Index, December 2024
TAX AND PENSIONS
How to apply for VAT exemption
How to apply for VAT exemption – and why
When it comes to VAT registration, you’ll find there are a range of products and services that are subject to VAT exemption. If your company trades solely in these types of products and services, your business will be classed as VAT exempt.
What is a VAT exemption?
When most products or services are sold, VAT is added to the original sale price, usually at a rate of 20%. However, certain products and services are exempt from VAT. Goods and services that are exempt are those that are considered to be essential, as you can see from the list below. If your business trades in VAT exempt supplies, you won’t be able to reclaim VAT on the costs your business incurs, such as your accountant’s fees.
So which areas are VAT exempt?
According to government guidelines, the areas are:
Insurance, finance and credit
Education and training
Fundraising events by charities
Subscriptions to membership organisations
Selling, leasing and letting of commercial land and buildings (this exemption can be waived).
Partial exemption
This is where it gets a bit more complicated. If you’re VAT registered, there’ll be cases where your sales may be subject to partial VAT exemption.
For example, if your business purchases or sells supplies classed as VAT exempt, but you also sell products that are subject to full VAT or reduced VAT payments, then you could be classed as partially VAT exempt.
As a company that is registered for fully and partially taxable supplies it’s your responsibility to keep separate ongoing records of your transactions to ensure that you pay the correct amounts of VAT on each.
Any exempt supplies should be recorded as such in your quarterly VAT return alongside your VAT taxable supplies.
Is there a difference between VAT exempt and zero-rated VAT?
Confused? You’re not the only one, but there is actually a difference here. There are a number of supplies that are subject to zero-rated VAT, but this is different from VAT exempt.
Examples of zero-rated goods include:
Children’s clothes
Books (but not ebooks)
Prescription medicines
Food and drink, with some exceptions
Donated goods sold by charity shops.
If you supply zero-rated goods, you should register for VAT. This is because you can still reclaim the VAT on any costs incurred by your business. However, if your business is registered as exempt because it trades in VAT exempt supplies, you can’t reclaim VAT on your costs.
How to register for VAT in the UK
You must register your business for VAT with HMRC if your taxable turnover exceeds £85,000 (2020/21) for any rolling 12-month period. Most businesses can register online at the Gov.uk website and sign up for a VAT online account, although some businesses are required to register by post. To register, you’ll need to provide details such as your business activity, bank details and turnover. Once you’ve registered, you’ll usually receive a VAT registration certificate within 30 working days.
How to file for VAT exemption
Before you go down this route, make sure it’s the right one for your business. If you’re VAT registered, you can reclaim VAT on your sale costs. However, adding VAT to your sales might impact on your customers, taking your prices out of their range. So, depending on what you trade in, you might find you’re better off VAT exempt.
If you decide to file for VAT exemption, you can do so using the registration form VAT1 available from the Gov.uk website.
Managing your VAT payments
When it comes to paying your business’s VAT bills, it’s best to establish a strategy for managing payments. If you’re organised, nothing will come back to haunt you. Of course, online accounting software such as QuickBooks will help you keep on top of your records and make sure you don’t miss any deadlines.
It also makes sense to plan ahead, so you’re making claims and allowances wherever you possibly can.
Whether you decide to go down the VAT exempt route or not, using online accounting software will be a huge help. You’ll find it vastly simplifies your accounting processes so it’s easier to stay on top of your VAT liabilities and payments.
We hope you’ve found this article outlining how to apply for VAT exemption useful. QuickBooks provide solutions for many common business requirements, including helping you stay on top of your VAT payments in line with HMRC’s Making Tax Digital initiative.
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