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Guide to VAT exemption for UK businesses

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Last editedNov 20202 min read

On 18 February 2020, the EU agreed to simplify the rules around VAT exemption for small businesses. In a nutshell, this means that more SMEs will be able to reduce the red tape and administrative costs associated with VAT compliance and be more competitive. Find out a little more about these VAT exemption schemes and what they could do for your business with our simple guide.

What are VAT-exempt schemes?

The EU has a number of special schemes set up to help small to medium-size businesses by allowing them to register as VAT-exempt. Designed to reduce the number of setbacks that small businesses have to face when they’re first starting out, VAT exemption can help to simplify taxation and reduce the amount of tax that eats into your business’s income.

But what do these VAT exemption schemes actually do? Essentially, they allow small enterprises with an annual turnover that doesn’t exceed a certain threshold to be exempted from VAT. This means that your business won’t be able to charge any VAT, while you’ll also lose the right to claim back VAT that appears on the invoices of other companies.

New rules on VAT exemption in the UK

As mentioned earlier in the article, the EU has simplified the rules around VAT exemption. Previously, the threshold at which companies needed to be below to qualify for VAT exemption was different in each member state. Now, the rules state that the given threshold cannot be higher than €85,000.

Furthermore, businesses will now be able to take advantage of exemptions established in other states than the one where the VAT is due, as long as the turnover in the state where the SME isn’t established is below the national threshold and the annual turnover in the EU is under €100,000.

Who qualifies for VAT exemption in the UK?

As you can see, not every small business qualifies for VAT exemption. In the UK, you must register for VAT if your VAT turnover is over £85,000. It’s important to remember that the exemption thresholds change every year. So, while your business may qualify for VAT exemption one year, it may not the next. It’s important to remember this information when you put together a business forecast – such as a cash flow forecast or a profit and loss forecast – or your estimates may end up being inaccurate.

What does VAT exemption in the UK actually mean?

Let’s say your business is VAT-exempt – in practical terms, what does this mean for your business? Essentially, you must adhere to the following rules:

  • You do not have to pay VAT to HMRC for any domestic sales

  • You cannot charge VAT in your invoices

  • You cannot deduct input tax from external invoices

  • You don’t have to submit a VAT tax return, or you only need to submit the annual VAT return in its simplified form

  • You need to observe all other tax regulations for issuing invoices

VAT-exempt items

It’s also worth remembering that there are a number of goods and services on which VAT isn’t charged, including insurance, education, and fundraising events. If all the products your business sells are VAT-exempt items, then you won’t need to register for VAT, although you also won’t be able to reclaim VAT on any business purchases.

VAT-exempt businesses and Brexit

Because the UK is scheduled to leave the EU on 31 December 2020, and as a result, is scheduled to leave the EU VAT scheme on the same date, it’s possible that these VAT exemption schemes may change after Brexit. However, the UK has indicated that they intend to keep the current VAT system in place, without deviating too far from the EU VAT scheme. For the time being, UK businesses are still subject to the EU VAT scheme, so there’s no need to worry about exemption from VAT coming to an end anytime soon.

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