Tax tip: VAT exemption and the zero rate

The distinction between supplies that are exempt from VAT and supplies that are subject to VAT at the zero rate can affect a supplier’s VAT recovery position because apart from certain exceptions VAT cannot be recovered on costs incurred to make exempt supplies.

VATA 1994 s 26(2) refers to the following supplies which provide VAT-registered suppliers with entitlement to recover VAT on eligible costs:

a) supplies made in the UK that are subject to VAT at any rate including the zero rate;

b) supplies made outside the UK which if made in the UK would be subject to VAT at any rate including the zero rate;

c) such other supplies outside the UK and such exempt supplies as the Treasury may by order specify.

Category c) above includes a reference to one of the exceptions to the general rule that VAT cannot...