Self-Instruct
Value Added Tax (VAT) is a tax that is commonly used around the world. In simple terms, it is a tax that is applied to the value added by businesses throughout the supply chain. The tax is collected by businesses on behalf of the government and paid to the government. The VAT is typically passed on to the final consumer as part of the price of goods and services.
However, not all goods and services are subject to VAT. Some goods and services are zero-rated, while others are exempt. Understanding the difference between these two categories is important for businesses that are registered for VAT and for consumers who may not be aware of the implications of these two concepts.
Zero-rated goods and services
Zero rated goods and services are those that are subject to VAT, but the VAT rate is 0%. This means that businesses that sell zero-rated goods and services are required to charge their customers VAT, but the rate of VAT is 0%. Examples of zero-rated goods and services include:
1. Food and drink – most basic food items, such as bread, milk, and vegetables, are zero-rated for VAT purposes.
2. Books – printed books, newspapers, and journals are zero-rated for VAT.
3. Children's clothing and footwear – clothing and footwear designed for children up to the age of 14 are zero-rated for VAT.
4. Medical equipment – certain medical equipment, such as wheelchairs and crutches, is zero-rated for VAT.
5. Public transport – bus and train fares are zero-rated for VAT.
6. Exports – goods that are exported outside of the European Union (EU) can be zero-rated for VAT.
7. Residential housing – the construction and sale of new residential properties can be zero-rated for VAT.
It's important to note that businesses that sell zero-rated goods and services can still claim back VAT on purchases they make from suppliers. This means that they effectively receive a VAT refund on these purchases. This is one of the main differences between zero-rated and exempt goods and services.
Exempt goods and services
Exempt goods and services are those that are not subject to VAT. This means that businesses that sell exempt goods and services do not charge VAT to their customers, and they also cannot claim back VAT on purchases they make from suppliers. Examples of exempt goods and services include:
1. Financial services – services such as banking, insurance, and lending are exempt from VAT.
2. Education – the provision of education and related goods and services are exempt from VAT.
3. Healthcare – the provision of healthcare services and related goods and services are exempt from VAT.
4. Postage stamps – postage stamps and certain other postal services are exempt from VAT.
5. Gambling – many forms of gambling and betting are exempt from VAT.
Exempt goods and services are different from zero-rated goods and services in that businesses cannot claim back VAT on purchases they make from suppliers. This means that the cost of these purchases is effectively higher for businesses that sell exempt goods and services. As a result, some businesses may choose to sell zero-rated goods and services instead of exempt goods and services.
Implications for businesses and consumers
For businesses, understanding the difference between zero-rated and exempt goods and services is important for several reasons. Firstly, businesses that sell zero-rated goods and services can claim back VAT on purchases they make from suppliers, whereas businesses that sell exempt goods and services cannot. This means that they may choose to sell zero-rated goods and services in order to receive a VAT refund on their purchases.
Secondly, businesses that sell zero-rated goods and services may have to charge VAT to their customers if the goods and services they sell cease to be zero-rated. For example, the UK government temporarily removed VAT on personal protective equipment (PPE) in response to the COVID-19 pandemic. However, this zero rating is due to expire on 31 October 2021. This means that businesses that sell PPE will have to start charging VAT after this date, which will increase the price of PPE for consumers.
For consumers, understanding the difference between zero-rated and exempt goods and services is important because it can affect the price of goods and services they buy. For example, if a business that sells zero-rated goods and services decides to charge VAT in the future, the price of those goods and services will increase. Similarly, if a business that sells exempt goods and services were to start charging VAT, the price of those goods and services would increase.
In conclusion, zero-rated and exempt goods and services are two different concepts that businesses and consumers need to be aware of. Zero-rated goods and services are subject to VAT at a rate of 0%, whereas exempt goods and services are not subject to VAT at all. Understanding the difference between these two categories is important for businesses that are registered for VAT and for consumers who want to understand the implications of these concepts.