Understanding VAT exempt goods and services

Being able to understand VAT is essential for any business – and can be confusing whether you’re a long standing industry expert or a fresh-faced start-up. It’s important to get your head around VAT in order to abide by the rules and regulations set out by HMRC.

However, not everything is taxable. In fact, there are a variety of products and services that can’t legally be taxed, and are therefore exempt from having any form of tax applied to them.

What services or products are exempt?

In order to pay the correct amount of tax on the products and services that you are planning to offer, it is easier to identify those for which you won’t need to pay anything.

The list of VAT-exempt products and services is actually much longer than you may think, which is why it’s so important that you are familiar with what applies to you and your business – no one wants to pay more than they need to.

If any of the following products or services are related to your business, you cannot legally charge VAT to those customers who pay for the services:

  • Sporting activities – including physical education
  • Gaming and betting (including Bingo)
  • Lottery related games – including lottery tickets and online games
  • Admission charges pertaining to entrance to museums, art exhibitions, zoos and performances
  • Antiques, works of art or similar items which are used to settle a tax or estate duty debt with HMRC
  • Admission charges for charities
  • Charitable or sponsored fundraising events
  • Human burial or cremation services
  • Funeral plans which are written under contracts of insurance
  • Care or medical treatments which are provided by hospitals, hospices or nursing homes
  • Health services provided by doctors, dentists, opticians, pharmacists and other health professionals
  • Educational services provided by schools, universities and colleges
  • Garages or parking spaces which are let together with properties for permanent residential use
  • Parking fees
  • Property, land and buildings
  • Houseboat moorings
  • Parking spaces or garages supplied with houseboat moorings
  • Public postal services
  • Financial services, investments and insurance

There are also goods and services which are categorised as “out of scope”, which means that a business cannot charge or reclaim VAT on those items or services.

These include:

  • Any goods or services which are bought and used outside of the EU
  • Statutory fees
  • Goods that are sold as part of a hobby – such as stamps
  • Donations made to a charity if there is nothing received in return

With regards to VAT registration, you do not need to register with HMRC if your business will only deal with VAT-exempt products or services. However, if your business will provide both VAT-exempt and taxable items, you can register for VAT voluntarily; this is essential if the total value of the taxable goods exceeds the VAT-taxable turnover threshold.

What is the VAT taxable turnover threshold?

Anything that is sold that isn’t exempt from tax must be totalled up to form the VAT-taxable turnover. This is what should be reported to HMRC if it exceeds what is known as the registration threshold within a rolling 12-month period. This doesn’t necessarily mean the tax year – it can be any 12-month period.

At present, the current threshold stands at £85,000, so if your VAT taxable turnover exceeds this, you need to register the amount directly with HMRC. This threshold usually increases with each tax year, beginning on the 1st of April.

In order to calculate whether you have exceeded this threshold, simply total up the following:

  • All goods which have been hired or loaned to customers
  • Business goods which are used for personal reasons
  • Goods which have been given as gifts, bartered or part-exchanged
  • Services which have been received from other businesses which are based in other countries that need to be “reverse charged”
  • Any building work over £100,000 that your business has conducted itself
  • Any zero-rated items – these aren’t VAT exempt, simply taxed at 0%

This should give you a grand total which you can compare to the current threshold. If this value isn’t a true representation of your turnover – i.e. it’s only temporarily exceeding £83,000 – you can apply for an exemption from registration with HMRC.

If you do exceed the threshold, you must register straight away – even if you haven’t yet worked out your turnover yet and expect it to be over £83,000.

It is important to ensure that you’re only paying VAT on the items that you are required to, particularly if you are a start-up company and only just finding your footing. The sooner that you are clear on the services your new business will provide, or the product it is to sell, the easier it is to set your new venture off smoothly and in line with HMRC regulations.

Quality Formations are an experienced company-formations agent that provide valuable business formation support and advice. Specialising in the registration of new businesses, the Quality Formations professionals are able to help with everything you need to start up your new business, from start to finish.

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