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Understanding VAT exemptions for small businesses

The Value Added Tax (VAT) system can seem complex and daunting for many small business owners.

However, it is crucial to understand the basics of VAT, including exemptions, to ensure accurate financial management and avoid potential penalties.


What are VAT exemptions?

It is important to understand what an exemption from VAT means.

Essentially, certain goods and services are not subject to VAT, meaning that businesses supplying these cannot charge VAT on their sales nor reclaim VAT on their related purchases.

These goods and services are defined by the UK government and are typically in areas of public interest, such as health and education.

Key VAT-exempt goods and services

Key VAT-exempt goods and services:

  • Education and Training Most educational and vocational training services provided by eligible bodies are exempt. Eligible bodies typically include schools, colleges, universities, and other bodies recognised by the law.
  • Health and Welfare Health services provided by registered health professionals such as doctors, dentists, and nurses are exempt from VAT. The same applies to welfare services provided by charities and state-regulated private welfare institutions or agencies.
  • Insurance and finance Most types of insurance and financial services are VAT exempt, but there are some exceptions.
  • Property Certain dealings with land and buildings are exempt from VAT, including the sale and lease of existing buildings. However, there are exceptions and complex rules in this category, especially concerning new buildings, renovations, and land for development. 

Implications of VAT exemptions for small businesses 

It’s important to note that while you do not charge VAT on exempt goods and services, nor can you claim VAT back on the costs related to these sales.

For small businesses supplying VAT-exempt goods or services, this means that VAT on any purchases or overheads becomes a cost to the business.

As a result, it’s crucial for businesses to consider VAT implications when setting prices.

Since VAT on costs related to exempt sales can’t be reclaimed, these costs need to be absorbed by the business and accounted for in the pricing strategy.

VAT exemptions can be a complex area, but it is vital for small businesses to understand their implications.

For more advice on VAT for your business, get in touch with our team today.