Exempt supply
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[1].
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[2].
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[3].
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[4]:
- 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[5].
Examples of Exempt supply
- Land: Supply of land or buildings is exempt from VAT. This includes the sale, leasing or renting of land or buildings.
- Insurance: Insurance services, including life assurance and health insurance, are exempt from VAT.
- Education: Education services, including tuition fees, are exempt from VAT.
- Health: Supply of health services, including medical services provided by a doctor, are exempt from VAT.
- Financial Services: Supply of financial services, such as banking, mortgage and investment services, are exempt from VAT.
- Charities: Supply of services by charities are exempt from VAT.
- Renting of Residential Accommodation: Renting of residential accommodation is exempt from VAT.
Advantages of Exempt supply
Exempt supplies offer many advantages to businesses and customers alike. These include:
- Avoiding VAT costs: Exempt supplies are not subject to Value Added Tax (VAT) so businesses can save on costs associated with this type of taxation. Customers can also benefit from this, as they do not have to pay the extra cost of VAT on their purchases.
- More competitive pricing: Exempt supplies can be sold at a lower price than non-exempt supplies, making them more competitive in the marketplace. This can be beneficial for businesses as it helps them to attract more customers and increase their sales.
- Easier to manage: Exempt supplies are usually simpler to manage than non-exempt supplies, as there is no need to calculate, collect and pay VAT. This can help businesses to save time and money on administration costs.
- Increased profits: Exempt supplies can lead to higher profits for businesses, as there is no VAT to pay on the sale of these goods or services. This can be beneficial for businesses in terms of boosting their bottom line.
Limitations of Exempt supply
- Exempt supplies do not generate output tax, so businesses cannot reclaim any input tax paid on purchases related to exempt supplies.
- Exempt supplies may not be able to be claimed as expenses for income tax deductions.
- Exempt supplies may not be eligible for other tax benefits such as capital allowances.
- Exempt supplies may still be subject to other taxes such as stamp duty or excise duty.
- Exempt supplies may still require the business to meet certain legal obligations such as registration, licensing or reporting requirements.
- Exempt supplies may limit the business's ability to offer discounts or promotional offers.
Other approaches related to Exempt supply include:
- Zero Rated Supply: Zero-rated supply is the supply of goods and services that are charged at the rate of 0%. Such goods and services are outside the scope of VAT and are not subject to VAT. Examples of zero-rated supplies include exports, medical services and supplies, food items and essential goods.
- Reduced Rated Supply: Reduced rated supply is the supply of goods and services that are charged at a rate lower than the standard rate. Such goods and services are within the scope of VAT, but at a reduced rate. Examples of reduced rated supplies include energy saving materials, books, newspapers and magazines.
- Input Tax: Input tax is the VAT on goods and services that are used to make a taxable supply. Input tax is recoverable, meaning that the supplier can claim it back from the tax authority.
Exempt supply, Zero rated supply, Reduced rated supply and Input tax are the other approaches related to Exempt supply. Exempt supply is where no VAT is charged as the supply is not a taxable supply, while Zero rated supply is the supply of goods and services that are charged at the rate of 0%. Reduced rated supply is the supply of goods and services that are charged at a rate lower than the standard rate, and Input tax is the VAT on goods and services that are used to make a taxable supply.
Footnotes
| Exempt supply — recommended articles |
| Prepaid rent — Full service leasing — Depreciation vs. amortization — Residual payment — Unencumbered property — Common area maintenance — Modified gross lease — Contract hire — Output tax |
References
- 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
