What is an Exempt Supply under VAT?

You’ve probably heard the term “VAT exempt supply” before, but it might not have dawned on you yet just how big of a role it plays in your business.

1. What Is Exempt Supply?

Exempt supplies are items or services that aren’t subject to VAT. At the same time, the taxpayer is not allowed to claim any related input on the exempt supplies. 

2. What Is Exempt Supply Under VAT?

In VAT, businesses incur input VAT at the time of procurement. In case the procured goods are taxable at specific rate or zero rate, then the input claim can be made. However, in case of exempt supplies, the businesses are not allowed to claim deduction of the input. 

3. Why Should I Care?

Since the taxpayer cannot claim the input VAT on the exempt supplies then the input VAT incurred has to be absorbed by the business. Consequently, the cost of production increases. Therefore, the businesses should evaluate its procurement and properly optimize from VAT stand point.

4. How Do I Calculate Exempt Supply Under VAT?

You don’t need to calculate any VAT on the exempt supply. The invoice will carry no VAT.

5. How Do I File and Pay VAT?

Taxpayers are not required to collect VAT on the exempt supplies. While filing the return, generally taxpayers simply declare the exempt supplies and don’t pay VAT to the tax authority. 

6. Examples of VAT exempt supplies

Following are some example of VAT exempt supplies in various tax jurisdictions:

United Arab Emirates

  • The supply of some financial services (clarified in VAT legislation)
  • Residential properties
  • Bare land
  • Local passenger transport

United Kingdom

  • Clothing
  • Over-the-Counter Drugs
  • Feminine Hygiene Products
  • Medical Equipment & Supplies
  • Food, Food Products, and Beverages

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