VAT is a crucial consideration for many businesses across the UK. Applying to most goods and services sold in the countries, there are nevertheless important VAT exemptions that every business and charity owner needs to understand. Confusingly, though, there are ‘VAT-exempt’ and ‘zero-rated’ items. So how do exemptions/zero-rating wor,k and which ones apply to which items?
What is the difference between VAT-exempt and zero-rated items?
At first glance, VAT-exempt and zero-rated items may seem identical because businesses do not charge VAT. However, the distinction lies in their treatment for VAT accounting and filing purposes:
- Zero-rated items: These items are taxable but at a 0% rate. This means that they should be accounted for in VAT returns. Furthermore, businesses supplying zero-rated goods or services can still reclaim VAT on their expenses.
- VAT-exempt items: These items or services are completely outside the scope of VAT. There is no VAT charge, but you do not need to account for them in your records. However, businesses supplying exempt items cannot reclaim the VAT they pay on associated costs.
Understanding which category your goods or services fall into is essential for accurate record-keeping and VAT returns.
Common VAT exemptions
Many goods and services are exempt from VAT. It can be difficult to understand what is exempt and what is zero-rated, so perhaps we can break some of them down by sector.
1. Food and drink
Most unprocessed food and drink for human consumption are zero-rated. So, VAT won’t be charged or accounted for on the bread, milk, eggs or fresh vegetables that a supermarket or corner shop sells. However, items like confectionery, sports drinks, soft drinks, ice cream, crisps and savoury snacks are always standard-rated (currently 20%). Alcohol is also standard-rated.
Things can get complicated in individual cases. For example, biscuits are zero-rated. On the other hand, Jaffa Cakes are standard-rated because they are considered cakes (settling that debate!). And yet, a biscuit partially or completely covered in chocolate will be standard-rated.
Furthermore, restaurants must always charge VAT on everything eaten on their premises or in communal areas designated for their customers. In addition, restaurants and takeaway vendors must charge VAT on all hot takeaways and home deliveries. However, they only need to charge VAT on cold takeaway food if it is to be eaten in a designated area.
2. Healthcare
Most healthcare services are VAT-exempt. Those within the scope of the tax are usually standard-rated, like food and drink. Some exempt goods and services include:
- Medical services are provided by registered healthcare professionals (e.g., GPs, dentists, nurses).
- Dental care services, including routine checkups and fillings.
- Eye tests performed by opticians.
- Prescriptions are provided by pharmacies.
Standard-rated goods and services in the healthcare sector are deemed less medically necessary, including over-the-counter medicines or most cosmetic surgeries – unless surgery is deemed medically necessary.
3. Charities
Charities enjoy several VAT reliefs. Most are zero-rated, including advertising, donated, and certain goods and services sold at fundraising events. The construction and sale of new buildings for a relevant charitable purpose are also zero-rated.
Meanwhile, admission charges by charities and charitable fundraising events are VAT-exempt.
Managing VAT
Effective VAT management is crucial for ensuring compliance and maximizing reclaim opportunities. Here are some key tips:
- Maintain accurate records: Categorise sales clearly, separating VAT-exempt, zero-rated, and standard-rated items on invoices to simplify calculations and audits.
- Track input VAT: Keep detailed records of the VAT you pay on business expenses to reclaim those tax costs.
- Avoid common mistakes: Misclassifying items or neglecting partial exemption rules can lead to errors. Regularly double-check your classifications and apply for partial exemptions if you supply taxable and exempt items.
- Stay updated on changes: VAT rules can change over time, so staying informed about the latest updates is crucial to ensure your business complies with current regulations.
By following these steps, businesses can manage VAT efficiently, reduce errors, and ensure compliance while maximising reclaim opportunities.
Need help with VAT exemptions? Get in touch with us. We’ll be ready to help.