If your business produces zero-rated supplies, you might want to consider registering for VAT so that you can recoup some of the tax that you already pay on your outgoings and expenses.

Everything is subject to VAT at the standard rate unless the legislation makes an exception for it, and the basic rule for VAT is that everything is subject to VAT at the standard rate. The list of goods and services that are exempt from paying VAT can be found in Schedule 8 of the VAT Act of 1994.

What exactly is the zero rating?

The vast majority of essential food items, water and sewage services, books and newspapers, certain building works, exports, transportation services like buses, trains, and aircraft, new residential accommodation, some supplies to charities, and children's clothing are exempt from the value-added tax under the zero-rating system. Even though there is no VAT on zero-rated supplies, the zero-rate is still a rate of tax. Businesses that make only zero-rated supplies are eligible to register for VAT and are able to recover the VAT on their costs and overheads if they do so.

What is not subject to the VAT?

If you only make exempt supplies, you will not be able to register for VAT and you will not be able to recover any VAT on costs that are attributable to making exempt supplies because exempt supplies fall outside the scope of the VAT regime and are not subject to a rate of tax. You are eligible to register for VAT if you make both taxable and exempt supplies, but you will not be able to recover the full amount of VAT that you paid on your costs.

What are VAT exempt supplies?

The majority of land and'second hand' residential properties and residential property rental are exempt supplies. Other exempt supplies are listed in Schedule 9 of the VAT Act 1994 and include insurance, education, health, betting, finance, postal services, professional subscriptions, sports competitions, and some charitable fund raising events and cultural activities.

The trap of going from zero-rated to VAT exempt!

One of the most common pitfalls that companies walk into is the situation in which they typically make zero-rated taxable supplies, but then change their minds, typically as a result of changes in the economy, and end up making exempt supplies without taking into consideration the implications for VAT recovery.

Examples ranging from zero-rated to exempt from VAT

An example of this would be a construction company that specialises in the construction and sale of residential real estate purchasing an old office building and transforming it into residential units. The plan is to sell them (as a zero-rated taxable supply), which will allow him to recoup the entire amount of VAT.

As a result of the downturn in the housing market, he makes the decision to rent them out instead of selling them (exempt supply). As a result, it is possible that he will now be required to pay back all of the VAT that he has claimed on the conversion costs.

Another illustration of this would be a certified public accountant who, in order to grow his practise, decides to start offering financial advice and, as a result, begins to earn sales commission from the financial products he recommends. This income is not subject to VAT, and all of a sudden he realises that a portion of the VAT he paid on overhead expenses cannot be recouped.

A useful piece of advice concerning exempt and zero-rated supplies

Be sure that you are familiar with the distinction between zero-rated and exempt supplies, as well as the potential effects that this distinction can have on your ability to recover the VAT that you have paid on your costs. If you plan on making exempt supplies, you need to make sure that you factor in the additional costs of the irrecoverable VAT before you get started. If you don't, you could be in for an unpleasant and expensive surprise later on.

If you make both exempt and taxable supplies, you are considered to be "partially exempt," and every three months you will have to perform a calculation to determine how much value-added tax (VAT) you are eligible to recover.

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