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VAT Exempt Sales Explained

Understand what HMRC means by VAT exempt sales, see some examples and understand why they don’t appear on VAT returns.

1. What Does VAT Exempt Mean?

VAT exempt sales are items that a business sells but are not considered a taxable supply. That means they are outside the scope of VAT, do not attract any VAT and do not need to appear on a VAT return. For this reason, businesses that supply VAT exempt products or services cannot register for VAT so cannot claim back VAT on expenses.

2. Example of Items that are VAT Exempt

Examples of VAT exempt sales include:

  • Insurance
  • Banking charges and interest
  • Nursing home fees
  • Services provided by doctors and dentists
  • Betting, gambling and lotteries (excluding slot machines)
  • Some selling and renting of land and property such as residential lets

3. What is the Difference between Zero-Rated and Exempt VAT Rates?

There are three VAT rates in the UK:

  • Standard Rate (20%)
  • Reduced Rate (5%)
  • Zero Rate (0%)

The difference between the zero-rated and exempt VAT rates is that, even though both in effect have no VAT added to their price zero-rated items count towards a business’ taxable turnover. That means if a business supplies zero-rated goods/services they must still register for VAT, if they reach the VAT threshold and show zero-rated sale on their VAT return. It also means that a zero-rated business can claim back VAT on what they spend to generate their sales, whereas a VAT exempt business cannot.