Hero image for Making Tax Digital VAT: are there exemptions?

Making Tax Digital VAT: are there exemptions?

Not every business has to follow HMRC’s new digital tax rules. Discover if you’re eligible for Making Tax Digital VAT exemption in this guide from QuickBooks.

6 min read

Heard about HMRC’s new Making Tax Digital (MTD) legislation, and wondering if it’s something you need to comply with? Find out what you need to do and whether your business is exempt in our summary of HMRC’s guidance to be fully in the know.

What does the HMRC MTD guidance cover?

HMRC’s initial guidance for MTD was first released in 2019, and was released to give businesses a clearer understanding of how to file their VAT returns online.

It explains in detail the three main criteria which could make businesses exempt from having to file a VAT return. These criteria have not changed since the introduction of MTD. 

You may be exempt from MTD:

  • If you are insolvent If your business has filed for insolvency, or has an ongoing procedure in place, you may be deemed exempt from having to file your MTD VAT return.

  • If you are unable to file on religious grounds You may be exempt from filing an MTD VAT return if your business does not keep digital records for religious reasons, even if your accounts are handled by someone outside of your organisation who is able to do so.

  • If you are unable to file because you do not have access to the appropriate digital tools. Despite the vast majority of Brits having a desktop or laptop computer, and access to the internet at home or work, MTD exemptions do accommodate those who do not. If you live in a remote part of the country which lacks reliable internet access, or you fall under the category of those who are unable to use digital tools, you may not need to file your VAT return through MTD.

If businesses feel they should be exempt from filing an MTD VAT return for other reasons, they will also be able to apply for official MTD exemption status with HMRC, who will take a “case-by-case” approach to determining whether this is appropriate.

Already exempt from online VAT submission?

If your business is already free from having to file its VAT return online, then good news! HMRC’s guidelines state that “exemptions from MTD for VAT are the same as those that are already in place for online filing for VAT”. However, if you haven’t checked your exemption status for a while, then you should do so now.

What are VAT exempt supplies?

There are some products and services which are exempt from VAT. If your company only trades in these areas, your business will be classed as VAT exempt.

Please note that if you are VAT exempt, it means you won’t be able to register for VAT on purchases or sales, or reclaim any VAT on your business purchases or expenses.

Products and services where VAT is not charged include:

  • Insurance, finance and credit

  • Education and training.

  • Fundraising events by charities.

  • Subscriptions to membership organisations.

  • Selling, leasing and letting of commercial land and buildings (although this exemption can be waived).

For more details on products and services where VAT is not charged, visit the Government’s online guide.

What is partial VAT exemption?

There are various ways in which a business can be classed as partially exempt from VAT. For example, you’ll be partially exempt if your business buys or sells goods or services that the Government classes as VAT exempt, but you also sell products which are subject to full or reduced VAT payments.

There are a few things you need to bear in mind if you are classed as partially exempt:

  • You can’t reclaim VAT you pay on goods and services that aren’t for business purposes. If your company buys something for both business and personal use, then you’ll need to split the VAT accordingly.

  • If your company makes both taxable and exempt supplies, it’s your responsibility to keep separate records of your transactions. This is to make sure 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.

What's the difference between zero rated and VAT exempt supplies?

There are some products and services that have a VAT rate of 0%. If you’re a supplier of zero-rated goods, you will still need to register for VAT through MTD. Any costs your business incurs can still be reclaimed for VAT. However, if your company is exempt from VAT because it trades in products and services where VAT is not charged, then it can’t reclaim VAT on costs.

Don't get caught out

Avoid paying penalties and stay on the right side of HMRC. Find out how QuickBooks keeps you compliant.

Discover QuickBooks today
QuickBooks screenshot

How to apply for VAT exemption

If you think you meet the MTD criteria for VAT exemption, contact the VAT Helpline to get confirmation. If you are indeed exempt from registration, read paragraph 3.11 of VAT Notice 700/1 to find out how to apply for VAT exemption.

Managing VAT

When it comes to paying your business’s VAT, be sure to work out a system for managing your payments. That way you can make sure nothing comes back to haunt you. It makes sense to do your research early to make sure you’re claiming all the allowances you possibly can. Finally, always be aware of how your decision can impact both your customers and suppliers.

Of course, HMRC-recognised VAT software makes sure you’re ready for the MTD for VAT changes, which went live in April 2019, and will apply to all VAT-registered businesses by April 2022. It will also help you keep on top of your records, regardless of whether you are VAT exempt or not.

What is the threshold for MTD?

Since April 2019, Making Tax Digital for VAT has been mandatory for businesses whose annual taxable turnover exceeds £85,000. However, if you're a VAT-registered business with an annual taxable turnover below the VAT threshold, we recommend signing up to Making Tax Digital sooner rather than later. 

That’s because in April 2021, HMRC are changing the way you can submit your VAT, and if you’re not complying with Making Tax Digital, you’ll need to submit your VAT records manually through your business tax account. It makes sense to start complying with MTD now to avoid spending time on manual data entry and risk making mistakes. 

With HMRC-approved MTD software like QuickBooks, you can submit your electronic records directly to HMRC in a matter of minutes. 

By April 2022, all VAT-registered businesses will have to sign up with MTD and use MTD-compatible software for their VAT returns. As of April 2023, the programme will also be expanded to cover Income Tax returns.

What are the penalties if your business is not VAT exempt?

As we mentioned above, businesses whose sales exceed the VAT threshold had to begin filing their VAT returns through MTD in April 2019. Initially, there was a planned year-long “soft landing period” so that the relevant companies could get organised and accustomed to the software. However, due to the Coronavirus pandemic, this soft landing period was extended until 1 April 2021.

Following this, HMRC will penalise VAT-registered companies who don’t comply with Making Tax Digital for VAT through a points-based system. Missing a VAT return will incur one point, and businesses will eventually be fined if they neglect to submit their returns in accordance with Making Tax Digital regulations.

Read our dedicated blog for more information on the penalties for not complying with MTD regulations.