In this section:

You are here:
Home >
VAT >
VAT rates and charging and reclaiming VAT on sales and purchases >
Reclaiming VAT >
Understanding VAT exemption and partial exemption

Understanding VAT exemption and partial exemption

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 and shows you what you need to do to reclaim VAT if your business is partly exempt.

On this page:

Exempt goods and services
An exempt business
A partly exempt business
Reclaiming VAT in a partly exempt business
Calculation to reclaim VAT - step one: all or nothing
Calculation to reclaim VAT - step two: mixed use
Annual adjustment
When you can reclaim input tax on purchases that relate to exempt items you sell
Non-business use of purchases in a partly exempt business
When you may waive exemption
Keeping records if your business is partly exempt
More useful links

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

Check which goods and services are exempt from VAT

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 in contrast 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.

Top

An exempt business

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 which items are exempt from VAT

Top

A partly exempt business

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.

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

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.

Calculation to reclaim VAT - step one: 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.

Top

Calculation to reclaim VAT - step two: 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

Example sales figures for calculating reclaimable VAT using the standard method
Sales	Amount
Exempt supplies	£50,000
Taxable supplies (ex VAT)	£80,000
Total sales	£130,000

Example purchase figures for calculating reclaimable VAT using the standard method
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%)

Using the standard method to calculate reclaimable VAT
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 us about your business type, and the types of supplies you make and your cost structure. It's a good idea to show us how your method works by using actual figures from your business. In order to obtain approval from HM Revenue & Customs (HMRC), you must declare that the proposed special method is 'fair and reasonable'.

More about making a special methods declaration in Revenue & Customs Brief 23/07

If we don't think your method produces a fair and reasonable result for your business we'll tell you why and ask you to change it or come up with a new one.

Top

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 VAT return for the next tax year. HMRC doesn’t consider these adjustments to be errors.

Top

When you can reclaim input tax on purchases that relate to exempt items you sell

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

Top

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.

1. Find out how much of the VAT on your purchases relates to your business purposes.

2. 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

Top

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