VAT exemption explained: how it works and what you need to know

VAT exemption often pops up in quirky news stories – whether it’s the debate over unheated pasties or an M&S cake sandwich. But beyond headlines, VAT exemption can have a real impact on how you manage your finances, pricing, and paperwork.

If you offer goods or services that qualify, getting to grips with what the exemption means – and how to apply for it – could save time, reduce errors and help with your cash flow.

Here’s what you need to know about how VAT exemption works in the UK and how to make sure you’re handling it correctly.

How does VAT exemption work and who qualifies?

In simple terms, if something is VAT-exempt, you don’t charge VAT on it, and you can’t reclaim VAT on related costs either. This is different from zero-rated items, which are taxed at 0% but still allow you to reclaim VAT on expenses. Standard-rated goods and services are, of course, charged at the usual 20% VAT rate.

Typical examples of exempt services include certain medical treatments, education, and financial services. These are listed in official government guidelines and supported by legislation.

Your eligibility depends on what you provide. If your business delivers healthcare, education, financial or charitable services, you might well fall under the UK’s VAT exemption list.

How do I know if my business is eligible for VAT exemption?

You’ll need to check HMRC’s guidance to see if your goods or services are specifically exempt. Eligibility is based on the nature of your offering, not just your business type.

What goods and services are on the UK VAT exemption list?

The VAT exemption rules cover a range of sectors. Below are some of the most common exempt categories (but, as with most things tax-related, there are always exceptions and nuances):

• Healthcare: Medical care provided by registered professionals, including GP services and dental treatments. Cosmetic procedures are usually not exempt unless medically necessary. You can read more about VAT medical exemption in HMRC’s VAT Notice 701/57.
• Education: Tuition provided by eligible institutions or private tutors in recognised subjects may qualify for VAT exemption on education. This includes schools, universities, and some training organisations.
• Financial services: Most services involving loans, credit, insurance or investment management are exempt.
• Charity work: Services provided by registered charities can qualify for VAT exemption for charities, particularly if they're related to their core purpose (such as fundraising or providing community support).

You can find a complete breakdown on HMRC’s website, and it’s wise to check the list regularly, especially if you’re expanding your services or changing suppliers.

How to apply for VAT exemption as a business or individual

If your business supplies or purchases goods and services that are exempt from VAT, it's essential to handle these transactions correctly to stay compliant and avoid costly mistakes. Here’s what to do:

1. Register with HMRC: Even if your goods or services are VAT-exempt, you may still need to register depending on your turnover.
2. Mark exempt items on invoices: Make sure your invoicing is accurate and transparent.
3. Keep valid documentation: This includes VAT exemption certificates or any official evidence supporting your exempt status.
4. Maintain strong records: Good record-keeping helps you back up your exemption claims if HMRC ever audits your business.

Understanding partial VAT exemption and how to calculate it

If your business sells a mix of VAT-exempt and VAT-taxable goods or services, you’ll need to follow partial VAT exemption rules.

That just means you can only reclaim VAT on the parts of your spending that relate to your taxable sales. If something is used for both exempt and taxable work, you’ll need to split the cost fairly.

HMRC has a standard way to do this, called the partial exemption calculation.

1. Identify your input tax (VAT paid on purchases).
2. Split it between exempt and taxable activities.
3. Apply the calculation method to work out how much VAT you can reclaim.

You can use HMRC’s VAT partial exemption toolkit to guide you on properly applying partial exemptions for VAT. 

VAT exemption for charities, education and healthcare providers

For charities, educational institutions and healthcare providers, in particular, there are specific rules you’ll need to follow closely:

• Charities: First, you have to be a registered charity. You may also need to submit a certificate to suppliers to confirm that VAT should not be charged. Not all charity activities are exempt, so check each service individually.
• Educational institutions: The courses you offer must be broadly equivalent to school, college, or university teaching. Vocational training may also qualify in some cases.
• Healthcare: Only registered health professionals can provide exempt services. While private clinics offering elective procedures might not qualify.

Always ensure you retain all supporting documentation and comply with HMRC’s requirements for each activity. Mistakes here can lead to fines or unexpected VAT bills.

VAT exemption and disabled customers: what conditions qualify

Certain goods and services for people with disabilities or older people are exempt from VAT. This includes things like:

• Wheelchairs and mobility aids.
• Adjustable beds and stairlifts.
• Installation and maintenance of disability equipment.

To benefit from the VAT exemption for disabled individuals, your customer will usually need to fill in a short form stating that they’re disabled or have a qualifying medical condition. The product or service must also be supplied for personal use, not resale or general use.

A full list of qualifying goods and medical conditions can be found in HMRC’s VAT Notice 701/7.

How VAT exemption interacts with business loans and finance

If your business is VAT-exempt, that means you don’t charge VAT on your sales, which sounds simple enough. But there’s a catch: You also can’t reclaim the VAT you pay on things like supplies, equipment, or services for your business.

So while VAT-registered businesses can often get that VAT back, you end up absorbing it as a cost. Over time, those costs add up and can put pressure on your cash flow, especially if you’re buying expensive equipment or using suppliers who do charge VAT.

Things can get more complicated if your business handles both exempt and taxable sales (this is known as “mixed supplies”). You’ll need to figure out which costs you can claim back VAT on, and which you can’t – and that can lead to delays or confusion when it’s time to submit your VAT return.

All of this means you might hit short-term cash flow gaps, particularly around quarterly VAT deadlines or during quieter trading periods. That’s why careful cash flow planning is essential.

An unsecured, short-term loan gives you fast access to funding without being locked in. You can use your loan to bridge gaps, cover VAT-related costs or invest in other areas of your business. 

If you’re unsure about how to access debt finance, check out our guide on how to get a business loan. 

Can I get a business loan to cover VAT if I’m exempt?

Yes, a flexible loan can help manage short-term costs or liquidity issues, even if you're not reclaiming VAT. It’s particularly useful for mixed supply businesses dealing with partial exemption.

Common mistakes and record-keeping tips for VAT-exempt businesses

Navigating VAT exemptions can be tricky (with even big, established companies falling afoul of them). Even small errors can lead to compliance issues, missed claims, or penalties. Whether you're new to VAT exemption or reviewing your current setup, it's worth checking for these common mistakes:

• Charging VAT on exempt services by mistake.
• Reclaiming VAT on goods used for exempt supplies.
• Failing to keep valid VAT exemption certificates.
• Not updating the exemption status when services change.

Good record-keeping is essential. Use digital tools to track exemptions and keep certificates, declarations and invoices organised. Regularly review your status and exemption use, especially if the service you’re providing changes or you grow.

What’s the difference between VAT exemption and zero-rated VAT?

VAT-exempt items are not taxed at all, and you cannot reclaim input VAT. Zero-rated goods are taxed at 0%, but you can still reclaim VAT on purchases.

Get help with your VAT bill

Managing VAT – especially if you're dealing with exemptions, changing rules, or seasonal cash flow – can put pressure on your working capital. If a looming VAT bill is creating a cash crunch, an iwoca Flexi-Loan can help

You could be waiting for client payments, managing a quiet sales period, or just need to bridge the gap while sorting through VAT-related complexities. Whatever the reason for the shortfall, a Flexi-Loan is designed to fit around you.

Borrow only what you need, when you need it – and repay early at no extra cost.

‍Ready to explore your options? Apply online for a Flexi-Loan in minutes – it’s fast, simple, and won’t affect your credit score.