Exempt supply is one where no VAT is charged as the supply is not a taxable supply. Input tax cannot be recovered where the input tax relates to the exempt supply. Examples of exempt supplies include supplies of land, insurance, education and health.
All states have found it necessary, when introducing a VAT, to create exceptions to the breadth of the potential scope of the operation of VAT. The standard way of dealing with this is to exempt certain forms of supply that are otherwise within the scope of VAT from liability to VAT. By definition, exempt supplies are not taxable supplies. By contrast, some states have adopted the practice of listing those supplies that are subject to VAT, rather than adopting the approach here.
A VAT registered trader who makes zero rated supplies but suffers standard rate VAT on its purchases can claim a repayment of the input VAT paid on the purchases. Traders making exempt supplies are not so lucky. A person making only exempt supplies cannot register for VAT and cannot recover VAT on inputs.
Types of exempt supplies
An exempt supply is one that is specifically made exempt under the Goods and Services Tax Act (GST Act). Supplies regarded as exempt are as follows:
- Supplies of financial services and goods and services which are reasonable incidental and necessary to a supply of financial services
- Supplies made by a non-profit body of donated goods and services
- Residential accommodation supplied by letting or under a licence to occupy
- The sale of a house, or the reversionary interest in fee simple estate of leasehold land, which has been used by the same person in the five years previous to the sale exclusively for the supply of residential accommodation
- Supplies of fine metal (other than those that have been zero-rated)
- Penalty or default interest imposed under a contract for the supply of goods and services, or under an enactment
- A penalty imposed on unpaid rates
- A postponement fee for the payment of rates that relates to the financial costs of the local authority arising from the postponement note that the administrative charge component of the postponement fee is subject to GST
Exempt supplies of real property
Where a supply of real property includes a residential complex and other real property, subsection of the Act provides that the residential complex is treated as a separate supply. Therefore, the residential complex is treated as a separate supply. Therefore, the residential complex which would have been exempt if supplied on its own will be exempt if supplied together with taxable property. For example, where the bottom storey of a building is used as a shopping concourse and the five upper storeys are rented out as apartments, only the five upper storeys, together with an apportionment of the common areas and land, would be considered to be a residential complex. The whole of a building, which includes a residential unit and a business is a residential complex, provided that the individual owner occupies and uses the building primarily as a place of residence.
- M. Hunt, M. Finney 2018, p.221
- V. Thuronyi 1996, p.202
- CTA - Awareness 2012, p.694
- S.J. Marsden 2013, p.133
- J. Heffernan 2008, p.69
- CTA - Awareness, (2012), BPP Learning Media, London.
- Heffernan J., (2008), GST/HST and Real Property in Canada, CCH Canadian Limited, Canada.
- Hunt M., Finney M., (2018), UK Taxation: A simplified guide for students, Spiramus Press Ltd, London.
- Marsden S.J., (2013), New Zealand Master Bookkeepers Guide, CCH New Zealand Limited, New Zealand.
- Thuronyi V., (1996), Tax Law Design and Drafting, International Monetary Fund, Washington.
Author: Mateusz Gołda