In this section:
- What you can and can't reclaim VAT on
- Purchases made before VAT registration: reclaiming the VAT
- Purchases for both business and private use: reclaiming VAT
- Business entertainment, business gifts and benefits
- Cars and motoring expenses: reclaiming VAT
- Travel and subsistence: when you can reclaim VAT
- Bad debts: how to reclaim the VAT
- Exempt and partially-exempt businesses for VAT purposes
- Capital assets - the Capital Goods Scheme for reclaiming VAT
- VAT receipts: what they have to show to be valid
Exempt and partially-exempt businesses for VAT purposes
Some goods and services are exempt from VAT, such as insurance and finance, education and training, and charitable fund-raising events.
If all of the goods and services you sell are exempt, your business is exempt and you won't be able to register for VAT. This means you won't be able to reclaim any VAT on your business purchases.
If you are VAT-registered and incur any input tax that will be used to make exempt supplies, you are classed as partly exempt. This guide provides information on exempt and partly exempt businesses. It shows you what you need to do to reclaim VAT if your business is partly exempt.
On this page:
- Exempt and partly exempt businesses explained
- Reclaiming VAT in a partly exempt business
- Calculations to reclaim VAT
- Annual adjustment
- Non-business use of purchases in a partly exempt business
- When you may waive exemption
- Keeping records if your business is partly exempt
- Acquiring or creating capital assets
- More useful links
Exempt and partly exempt businesses explained
Exempt goods and services
There are some goods and services on which VAT is not charged. These are exempt from VAT. Items that are exempt from VAT include the following:
- insurance, finance and credit
- education and training
- fund raising events by charities
- subscriptions to membership organisations
- selling, leasing and letting of commercial land and buildings - but this exemption can be waived
Exempt supplies are not taxable for VAT. So you do not include sales of exempt goods or services in your taxable turnover for VAT purposes. If you buy exempt items, there is no VAT to reclaim.
This is different to zero-rated supplies. In both cases VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT - at 0 per cent.
Find out what goods and services are exempt from VAT
If you only sell or supply exempt goods or services
If you only sell or otherwise supply goods or services that are exempt from VAT then your business is an exempt business. You cannot register for VAT - so you won't be able to reclaim any VAT on your purchases.
This is in contrast to the situation if you sell or otherwise supply zero-rated goods or services, where you can reclaim the VAT on any purchases that relate to those sales. In addition, if you sell mainly or only zero-rated items, you may apply for an exemption from VAT registration, but then you can't claim back your input tax.
Find out more about registering for VAT and VAT thresholds
Get details about the different VAT rates
Find out what goods and services are exempt from VAT
If you are registered for VAT but make some exempt supplies
Your business is partly exempt if you are VAT-registered and pay out VAT on purchases that are used to make exempt supplies.
Generally, you won't be able to reclaim the VAT you've paid on purchases that relate to your exempt supplies. However, provided the amount of VAT incurred relating to exempt supplies is below a certain amount, the VAT can be recovered in full. See the sections in this guide on reclaiming VAT in a partly exempt business.
Reclaiming VAT in a partly exempt business
If your business is partly exempt, and you want to reclaim input tax - the VAT you incur on purchases that relate to your business activities - you must make two calculations each time you complete your VAT Return. You add the results of these two calculations together - this is the amount of input tax you can reclaim.
These calculations are based on the use you make or intend to make of your purchases - whether that use is:
- entirely for the taxable supplies you make
- entirely for the exempt supplies you make
- partly for the taxable supplies you make and partly for the exempt supplies you make
If the amount of VAT incurred relating to exempt supplies is below a certain amount, the VAT can be recovered in full. See the section in this guide on calculations to reclaim VAT.
Once a year - usually at the end of your VAT tax year - you must review how much VAT you've reclaimed throughout the year and make an annual adjustment. See the section in this guide on making your annual adjustment.
Calculations to reclaim VAT
Step 1: all or nothing
Each time you complete a VAT Return you need to look at all of your business purchases to identify:
- the items that relate entirely to your taxable supplies
- the items that relate entirely to your exempt supplies
You can generally reclaim all the input tax you've paid on purchases that relate entirely to your taxable supplies, but none of the input tax on your purchases that relate entirely to exempt supplies.
Step 2: mixed use
Next you'll need to identify your business purchases that relate both to your taxable supplies and to your exempt supplies - for example, phone bills or accountancy fees.
You'll only be able to reclaim the input tax on the proportion that relates to your taxable supplies.
You can work out the percentage you can reclaim in one of two ways:
- our standard method
- your own special method
Standard method
This calculation method is suitable for most smaller businesses.
You divide the value of your taxable supplies by the value of all your supplies added together - both taxable and exempt. This is the percentage of VAT you can reclaim on your purchases that you use for both exempt and taxable purposes.
You then apply this percentage to the input tax on your mixed use purchases. The result is the amount of input tax you can reclaim.
Example of standard method - simplified
| Sales | Amount |
|---|---|
| Exempt supplies | £50,000 |
| Taxable supplies (ex VAT) | £80,000 |
| Total sales | £130,000 |
| VAT on purchases | Amount |
|---|---|
| Input tax relating entirely to exempt supplies | £7,500 |
| Input tax relating entirely to taxable supplies | £12,500 |
| Input tax relating to both taxable and exempt supplies | £5,000 |
| Total input tax paid on purchases | £25,000 |
Standard method of apportioning £5,000:
£80,000/£130,000 = 61.5% (round up to 62%)
| VAT that can be reclaimed | Amount |
|---|---|
| Input tax relating to taxable supplies | £12,500 |
| 62% of input tax relating to both taxable and exempt supplies | £3,100 |
| Total input tax that can be reclaimed | £15,600 |
You can't recover:
- the input tax that relates entirely to exempt supplies: £7,500
- the portion of the input tax on your mixed use purchases that relates to exempt supplies: £1,900
Your total unrecoverable input tax is therefore £7,500 + £1,900 = £9,400.
Special method
If you feel that the standard method isn't right for your business you can create your own method to reflect your unique business circumstances. Your method must produce a fair and reasonable result.
We'll have to approve your special method before you can use it. You need to tell HM Revenue & Customs (HMRC) about your business type, and the types of supplies you make and your cost structure. It's a good idea to show HMRC how your method works by using actual figures from your business. In order to obtain approval from HMRC, you must declare that the proposed special method is 'fair and reasonable'.
If HMRC doesn't think your method produces a fair and reasonable result for your business they'll tell you why and ask you to change it or come up with a new one.
When you can reclaim all your input tax relating to exempt supplies
If you can show that you have paid only a relatively small amount of input tax on your purchases that relate to your exempt sales or other supplies you may be able to reclaim all of that input tax.
You'll be able to reclaim all such input tax in the relevant period if both the following are true:
- the amount isn't more than £625 per month on average
- the amount isn't more than half of your total input tax reclaimed
Annual adjustment
Once a year - usually at the end of your VAT tax year - you must review
how much input tax you've reclaimed throughout the year and make an
adjustment.
You need to:
- Check your VAT calculations. Were the goods and services you bought and that you reclaimed input tax on indeed used entirely for taxable supplies? Were the goods and services you bought which you didn't reclaim input tax on indeed used entirely for exempt sales? Were the goods and services you used partly for taxable supplies and partly for exempt supplies used in the proportion you calculated?
- Make any necessary adjustments on your next VAT Return. This is normally done on your first return for the next tax year. HMRC doesn't consider these adjustments to be errors.
Non-business use of purchases in a partly exempt business
You can't reclaim any VAT you pay on goods and services that aren't for business purposes.
If your business is partly exempt and you buy goods or services that you use partly for business and partly for non-business purposes, in order to reclaim VAT, you must follow both these steps.
- Find out how much of the VAT on your purchases relates to your business purposes.
- Use your partial exemption method to find out how much of your business VAT you can claim.
Find out how to split VAT between business and non-business use
When you may waive exemption
If you sell, lease or let commercial land or property, you can choose to waive the exemption and to charge VAT at the standard rate. Input tax used to make taxable supplies can be reclaimed.
More about opting to tax property in VAT Notice 742A
Keeping records if your business is partly exempt
If you make both taxable and exempt supplies, you must keep a separate record of your exempt sales and details of how you've worked out how much VAT to reclaim.
Get details of the VAT records you need to keep
Acquiring or creating a capital asset
If you're a VAT registered trader and you acquire or create an expensive capital asset, or you have one when you first register for VAT, you may have to use the Capital Goods Scheme to adjust how much input tax you initially reclaimed in future years. The scheme applies when you spend, net of VAT:
- £250,000 or more on land or buildings, or on building or civil engineering works
- £50,000 or more on a single computer or piece of computer equipment
If your business has an asset and the extent to which you use it to make VAT taxable supplies - rather than exempt supplies - varies over the following five or ten years (depending on the asset), you'll have to adjust the amount of input tax you reclaimed. You can reclaim more if the proportion of your taxable supplies increases, but you'll have to repay some if it decreases.
Find out more about adjusting VAT claimed on capital assets
More useful links
More about partial exemption in VAT Notice 706
More about exempt supplies in VAT Notice 700/1
More about exempt supplies and partial exemption in VAT Notice 700
