Exempt supply

What it means

An exempt supply is a supply on which VAT is not charged. The law distinguishes two groups: exemption with the right to deduct input tax and exemption without it - and the difference matters enormously to a business.

With the right to deduct come exports and intra-EU supplies. Without it are, for instance, postal services, insurance, financial services, letting of property under statutory conditions, healthcare, and education.

An exemption is neither a relief you have to apply for nor an option you can decline. If a supply meets the statutory conditions, no tax is charged, even if the customer would rather receive an invoice with a VAT rate and deduct the tax. The exception is letting of property, where the Act allows the supplier to opt to tax under set conditions.

How it works in practice

A company making exempt supplies without the right to deduct cannot recover input tax on the related purchases. Where both kinds of supply are made, the deduction is restricted by a coefficient, applied provisionally during the year and settled after it.

Exempt supplies are reported in the return and, depending on type, in the control statement or the EC sales list. Correct treatment always starts by determining the place of supply.

A typical case is an s. r. o. that owns a house and lets flats in it as homes. The letting is exempt, so VAT on repairs and refurbishment cannot be deducted, and if the house was bought with the tax deducted and letting started only later, an adjustment of deducted tax has to be made for the years the Act sets for property.

What to watch out for

Confusing exemption with a zero rate or with something outside the scope of the tax is a common error with a double effect: a wrong return and a wrong input deduction. Letting property additionally raises the option to tax, which has conditions of its own.

The sale of a building is exempt only once the statutory period since its first occupancy approval has passed; an earlier sale is a taxable supply. A company that sells a new hall without VAT, believing property is always exempt, owes tax on the whole price and often cannot recover it from the buyer after the fact.