VAT Exemption: What It Means for a Business and What It Costs You

A VAT exempt supply carries no VAT on the invoice, but exemption is not the same thing as zero-rating and the difference is worth real money. Exemption blocks recovery of the VAT on the costs behind the sale, so that VAT stays in your accounts as a cost you never get back. Exempt turnover also sits outside the £90,000 registration threshold. The exempt supplies are the sixteen groups listed in Schedule 9 of the Value Added Tax Act 1994.

That last point about recovery is where the money sits. Two businesses can both issue invoices showing £0 of VAT and end the year in completely different positions, because one of them gets the VAT on its rent, its equipment and its professional fees back and the other does not. This page explains what exemption is, lists the Schedule 9 groups, and works the partial exemption de minimis test in figures, because that test is the one small businesses most often apply wrongly.

Each specific exemption has its own page on this site. This is the parent, and it routes you down to the right child at the end.

The rule: Schedule 9 of the VAT Act 1994

VAT is charged on taxable supplies made in the UK by a taxable person in the course or furtherance of a business. Exemption works by lifting particular descriptions of supply out of that charge. The descriptions are set out in VATA 1994 Schedule 9, which is indexed in Part I and set out in full in Part II. There are sixteen groups.

Two consequences flow from the way the legislation is built, and both matter more than the list itself.

First, an exempt supply is not a taxable supply. That is not a technicality. The whole input tax recovery mechanism depends on costs being attributable to taxable supplies. Take the supply out of the taxable category and the attributable input tax has nothing to attach to, so it is not recoverable. A zero-rated supply, by contrast, remains a taxable supply. It is simply taxed at 0%. Recovery survives because the supply is still taxable.

Second, exemption attaches to supplies, not to businesses. There is no such thing in the legislation as an exempt business. A physiotherapy practice that also sells supports and braces over the counter is making exempt supplies and standard-rated supplies from the same premises on the same day. That is normal, and it is what puts a business into the partial exemption rules further down this page.

Schedule 9 now also carries a Part 3 (Exceptions), inserted by Finance Act 2025, which removes the exemption from certain education supplies. That change is explained in full on our VAT on education page, which owns that topic. It is noted here only so the structure of the Schedule makes sense: since that amendment, a supply is exempt if it is described in Part 2 and is not described in Part 3.

Exempt against zero-rated: the distinction that costs money

This is the single most useful table on the page. Both columns produce an invoice with no VAT on it. Only one column gets the VAT on its costs back.

Exempt: no VAT charged, no input tax recovered	Zero-rated: 0% charged, input tax still recovered
A funeral director's disposal of remains and the arrangements connected with it	A baker's loaf of bread sold cold over the counter
An undertaker's crematorium fee	A printer's run of 5,000 leaflets
A physiotherapist's treatment of a patient, where the practitioner is on the statutory register and the primary purpose is the patient's health	A children's clothing shop's school-age coats, within the published measurement limits
A sports club's playing membership subscription	A coach operator's 52-seat day trip
A landlord's rent on a commercial unit where no option to tax has been made	A bookshop's paperbacks, and the electronic versions of them

Both columns show £0 of VAT on the invoice, and only the right-hand column gets the VAT on its costs back. That is why zero-rating is worth more than exemption.

Work it through with the printer and the funeral director. The printer buys paper, ink, a press and a unit to put it in, and recovers the VAT on all of it, because the leaflets are taxable supplies charged at 0%. The funeral director buys a hearse, pays rent on a chapel of rest and takes professional advice, and recovers none of the VAT attributable to the exempt funeral supplies. On a £60,000 vehicle, that is £10,000 of VAT which the printer would have reclaimed and the funeral director simply absorbs.

The zero-rated groups sit in a separate Schedule, Schedule 8, and they cover food, books and printed matter, children's clothing and footwear, passenger transport, construction of new dwellings, certain supplies to charities and more. The detail of that side of the line, including how insurance compares, is on our zero-rated VAT page.

The sixteen Schedule 9 groups

These are the group names as they appear in the Part I index. Where this site has a page on a group, it is linked.

Group	Name	In one line
1	Land	The grant of an interest in or right over land, subject to a list of exceptions and to the option to tax. Most commercial rent is exempt unless the landlord has opted.
2	Insurance	Insurance and reinsurance transactions and related services by brokers and agents. Premiums usually carry insurance premium tax instead of VAT. See insurance premium tax.
3	Postal services	Public postal services within the scope of the universal service obligation. Courier and most commercial delivery services are standard-rated.
4	Betting, gaming, dutiable machine games and lotteries	Stakes and participation, which carry their own duties instead of VAT. Admission charges and ancillary sales are a separate question.
5	Finance	The making of advances and the granting of credit, dealing in money and securities, and intermediary services. This is why a lender's fee income carries no VAT.
6	Education	Education and vocational training by an eligible body, and private tuition by an individual teacher acting independently. Now read with Part 3. See VAT on education.
7	Health and welfare	Medical care by a practitioner on the relevant statutory register where the primary purpose is the protection, maintenance or restoration of health, plus welfare services by charities, public bodies and state-regulated providers.
8	Burial and cremation	The disposal of remains and the arrangements for it. See funeral costs and VAT.
9	Subscriptions to trade unions, professional and other public interest bodies	Membership subscriptions to qualifying bodies. See VAT on membership fees.
10	Sport, sports competitions and physical education	Playing membership and participation in sport supplied by an eligible body, and competition entry fees in defined circumstances.
11	Works of art etc	Narrow, dealing mainly with disposals connected with inheritance tax reliefs and conditional exemption.
12	Fund raising events by charities and other qualifying bodies	Qualifying one-off fundraising events, within limits on the number of events held at the same location in a year.
13	Cultural services etc	Admission to museums, galleries, zoos and performances supplied by eligible public or non-profit bodies.
14	Supplies of goods where input tax cannot be recovered	A blocking group: it exempts the onward sale of goods on which input tax was never recoverable, so the same VAT is not suffered twice.
15	Investment gold	Investment-grade gold as defined, with its own special accounting and record-keeping rules.
16	Supplies of services by groups involving cost sharing	Services supplied at cost by a qualifying cost sharing group to its exempt or non-business members.

Two cautions on using this list. The group names are the safe part; the detailed items and notes inside each group are where the real boundaries live, and they are not reproduced here. Group 1 in particular carries a list of exceptions which pull specific land transactions back into the charge, and the option to tax can override the exemption on commercial property altogether. If a land question is live, read HMRC Notice 742A rather than relying on the one-line summary above.

VAT exemption for a business: the three consequences, in order

When people search for VAT exemption business they are usually asking what it does to them commercially. Three things, and they are worth taking in this order.

1. No output VAT on the exempt sale

You do not add 20% to the invoice. To the customer, this looks identical to a zero-rated sale. On a £400 physiotherapy course of treatment the patient pays £400, not £480. For a business whose customers are consumers or other exempt bodies who could not have recovered the VAT anyway, this is a genuine competitive position: your price is the customer's cost.

2. No input tax recovery on the attributable costs

This is the one that surprises people. Every cost that is attributable to an exempt supply carries VAT you cannot recover. Rent where the landlord has opted to tax, equipment, software subscriptions, professional fees, marketing, vehicles, repairs. If the cost sits behind an exempt supply, the 20% on it is not a reclaimable asset in your accounts, it is part of the cost of the thing.

The practical effect is that an exempt business budgets in VAT-inclusive figures. A £2,000 piece of equipment is £2,400 to you, permanently. A standard-rated competitor prices the same item at £2,000 net. That gap is structural and it does not go away with better bookkeeping.

3. Exempt turnover is outside the £90,000 registration test

The registration test in Schedule 1 runs on taxable turnover: standard-rated, reduced-rated and zero-rated supplies. Exempt supplies are not taxable supplies, so they never count. A practice turning over £400,000 entirely from exempt medical care has no duty to register at all, and cannot register voluntarily, because there are no taxable supplies for recovery to attach to.

For a mixed business, the test runs only on the taxable slice. A sports club with £180,000 of exempt playing subscriptions and £52,000 of bar and function-room takings tests the £52,000 against £90,000, not the £232,000. The full mechanics of the rolling test are on our VAT threshold page, and the mirror position for a zero-rated seller, where registration is usually worth seeking rather than avoiding, is on when to register for VAT if you sell zero-rated goods.

Outside the scope is a third thing again

Exempt and zero-rated are two of three categories, not two of two. The third is outside the scope, and it means there is no supply for consideration at all, so VAT never engages.

The paradigm is a freely given donation. Money handed over with nothing supplied in return is not consideration for anything, so it is not a supply, so it is neither taxable nor exempt. It is simply outside the system. Grant funding with no strings, and genuine compensation payments, often land in the same place.

Outside the scope resembles exemption in one respect, which is that it does not support input tax recovery either. It differs in how it is counted and reported: an exempt supply is a supply that goes into the partial exemption calculation, while a non-business activity goes into a business and non-business apportionment first, before partial exemption is even reached. A club or a not-for-profit that mislabels donated income as exempt turnover, or exempt subscription income as a donation, distorts both calculations at once. That is the usual source of error in the sector.

Partial exemption: the de minimis limit, and the two 50% tests that are not the same test

Most businesses that make exempt supplies also make some taxable ones. Once registered, such a business is partly exempt, and its input tax has to be attributed in three buckets.

• Directly attributable to taxable supplies: recoverable in full. The bar stock at the sports club, the braces the physiotherapist resells.
• Directly attributable to exempt supplies: not recoverable. The treatment-room equipment, the hearse.
• Residual: costs that support both. Rent, heat and light, accountancy, the phone system. Recoverable in the taxable proportion.

The standard method

The standard method apportions the residual pot using a value-based fraction. In HMRC's own words in VAT Notice 706:

"Value of taxable supplies in the period (excluding VAT) / total value of supplies in the period (excluding VAT) x 100 = recoverable percentage"

The resulting percentage is rounded up. So a business with £52,000 of taxable supplies and £180,000 of exempt supplies in the period has taxable supplies of £52,000 out of £232,000, which is 22.41%, rounded up to 23%. Twenty-three per cent of the residual input tax is recoverable, on top of everything directly attributable to taxable supplies.

The de minimis limit: both limbs, and they are cumulative

There is then a relief which lets a business with only a little exempt input tax recover the lot. This is the de minimis limit, in regulation 106 of the VAT Regulations 1995. Exempt input tax is recoverable in full where it:

1. does not exceed £625 per month on average, which is £1,875 a VAT quarter and £7,500 a year; and
2. does not exceed one half of all input tax for the period concerned.

Regulation 106 puts it this way: relevant input tax which "does not amount to more than £625 per month on average, and ... does not exceed one half of all his input tax for the period concerned" is treated as attributable to taxable supplies.

Both limbs. Cumulative. Fail either one and the exempt input tax is not recoverable, no matter how comfortably the other limb passes.

The two simplified tests, and the different 50%

HMRC also operates two simplified de minimis tests, at Notice 706 paragraph 11.7, so that a business can establish it is de minimis without doing the full attribution exercise first.

• Simplified test one: total input tax is no more than £625 per month on average, and the value of exempt supplies is no more than 50% of the value of all supplies.
• Simplified test two: total input tax less input tax directly attributable to taxable supplies is no more than £625 per month on average, and the value of exempt supplies is no more than 50% of the value of all supplies.

The 50% in the simplified tests is a different 50%.

Set the two side by side and the difference is unmissable.

Test	What the 50% compares	Figures you need
The de minimis test (regulation 106)	Exempt input tax against total input tax	VAT on your purchases, split by what it is attributable to
Simplified tests one and two (Notice 706 para 11.7)	Value of exempt supplies against value of all supplies	Your sales figures, net of VAT

One 50% is about input tax, which is VAT on what you bought. The other is about supplies, which is the value of what you sold. They are different numbers measuring different things, and a business can easily pass one and fail the other. Reading one as the other is the misapplication this section exists to correct: the business checks that exempt sales are under half of total sales, concludes it is de minimis, and recovers exempt input tax it was never entitled to.

Note also that the three tests are alternatives. Notice 706 paragraph 11.8 is explicit that a business is de minimis if it passes any one of them, whether that is one of the two simplified tests or the full regulation 106 test. They are not hurdles to clear in sequence.

One further point which belongs here rather than in the worked examples: the de minimis tests are applied per return period and then again over the partial exemption longer period, as part of the annual adjustment. A business can be de minimis in three quarters out of four and fail on the annual figures, in which case the earlier recovery is adjusted back. There is also a standard method override which can apply where the standard method gives a result that does not fairly reflect the use of the costs. The mechanics of both are set out in Notice 706, and if either is in play the calculation needs checking against the notice rather than against a summary. A dedicated de minimis calculator is planned for this site separately.

Worked examples: the de minimis test, quarter by quarter

Example one: a funeral director who passes both limbs

A funeral director makes exempt supplies of funerals under Group 8 and standard-rated supplies of memorial masonry and flowers. In the quarter to 30 June, total input tax is £2,400, of which £900 is attributable to the exempt funeral supplies.

• Limb (a), the money limit. The quarterly equivalent of £625 a month is £1,875. Exempt input tax of £900 is below £1,875, so limb (a) passes.
• Limb (b), the half of all input tax limit. Half of total input tax of £2,400 is £1,200. Exempt input tax of £900 is below £1,200, so limb (b) passes.

Both limbs pass, so the business is de minimis for the quarter and the £900 of exempt input tax is recoverable in full. The VAT return claims the whole £2,400.

Example two: the same business, one limb fails

In the quarter to 30 September the same funeral director has a quiet period for masonry work. Total input tax is again £2,400, but £1,400 of it is attributable to exempt supplies.

• Limb (a). £1,400 is still below the quarterly £1,875, so limb (a) passes. Nothing has gone wrong yet on the money limit.
• Limb (b). Half of £2,400 is £1,200. Exempt input tax of £1,400 is more than £1,200, so limb (b) fails.

One limb failing is enough. The business is not de minimis for this quarter, and the £1,400 is not recoverable. Only the £1,000 attributable to taxable supplies is claimed.

Compare the two quarters. The total input tax is identical at £2,400 both times. The exempt input tax moved by £500 and stayed comfortably under the £1,875 money limit throughout. Yet the recoverable figure fell from £2,400 to £1,000, a swing of £1,400, entirely on the second limb. A business watching only the £625 monthly average would have claimed the full £2,400 in both quarters and carried an assessable error into the second one.

Example three: why the wrong 50% gives the wrong answer

Take that September quarter again and add the sales figures. Exempt funeral turnover is £58,000 and taxable masonry and floristry turnover is £62,000, so total supplies are £120,000 and exempt supplies are 48.3% of them, comfortably under 50%.

A business that reaches for the supplies-based 50% and stops there concludes it is de minimis and recovers all £2,400. But the supplies-based 50% belongs to the simplified tests, and both of those also require total input tax (or total input tax less the directly attributable taxable element) to be no more than £625 a month on average, which is £1,875 a quarter. Total input tax here is £2,400, so neither simplified test is passed either. The correct answer remains the one in example two: £1,400 is blocked. The supplies percentage never mattered, because the test that applied was the one measured on input tax.

What people get wrong

• Treating the de minimis limit as a single 50% test. This is the error at the top of the list for a reason. There are two 50% tests: exempt input tax against total input tax in regulation 106, and value of exempt supplies against value of all supplies in the two simplified tests. Checking the wrong one produces a confident, well-documented and incorrect recovery claim.
• Applying the £625 as a quarterly figure. It is a monthly average. On a quarterly return the figure to compare against is £1,875, and on an annual basis it is £7,500. Testing £625 against a quarter's exempt input tax blocks recovery that was properly due.
• Saying "we are VAT exempt" when you mean "we are not VAT registered". These are unrelated situations. A business under the threshold making standard-rated supplies is a taxable business that has not yet had to register, and it will have to once it crosses £90,000. A business making exempt supplies never crosses the test on that turnover at all. The two get conflated in conversation constantly, and they lead to opposite answers on registration.
• Assuming exempt is better than standard-rated. It is almost always worse than zero-rating, and where a business sells mainly to VAT-registered customers it can be worse than standard rating too. A standard-rated supplier's business customers reclaim the VAT charged, so the 20% costs them nothing, while the supplier recovers all its own input tax. The exempt supplier charges nothing but absorbs the VAT on every cost. Never treat exemption as a benefit without pricing in the blocked recovery.
• Forgetting the annual adjustment. The de minimis tests are applied per return period and again over the longer period. Quarterly passes do not settle the year.
• Assuming exempt turnover counts toward £90,000. It does not, and for many readers this is the most valuable line on the page. The mirror error is assuming zero-rated turnover does not count. It does. Taxable turnover includes zero-rated supplies and excludes exempt ones.
• Deciding exemption at business level. Exemption attaches to supplies. A single business can, and often does, make exempt, zero-rated and standard-rated supplies in the same week.

Which exemption applies to you

This page is the parent. Each specific exemption is worked in detail on its own page.

• Health, medical and welfare work, including the two cumulative conditions of registration and health purpose, sits in Group 7.
• Education and training, including what Part 3 of Schedule 9 changed and what it did not: VAT on education.
• Club and association subscriptions under Group 9 and playing membership under Group 10: VAT on membership fees.
• Funerals, burial and cremation under Group 8: funeral costs and VAT.
• Insurance under Group 2, and the tax that applies to premiums instead: insurance premium tax.
• Passenger transport, which is mostly zero-rated rather than exempt and is a common source of confusion: VAT on transport.
• The zero-rated side of the line in full, including how insurance compares with zero-rating: zero-rated VAT.

Related reading

• The £90,000 VAT registration threshold, and why exempt turnover sits outside it.
• When to register for VAT if you sell zero-rated goods.
• How to complete and submit a VAT return, including where the recoverable input tax figure goes.
• Flat rate VAT against standard VAT accounting.
• HMRC, Partial exemption (VAT Notice 706), for the annual adjustment, the standard method override and the special method application process.

Figures and statutory references on this page were checked against legislation.gov.uk and current HMRC guidance on 11 September 2026. VAT liability is decided supply by supply on the facts, and a borderline supply is worth checking before the return is filed rather than after.