Generally speaking, most goods and services in Europe incur value-added tax throughout different production stages. However, some goods and services are VAT-exempt. This means that the tax is not charged on a given item at the final point of sale to the consumer, or during the intermediate phases when the item moves from one business to the next. Let’s take a look at VAT-exempt products, with a focus on the EU.
General application for VAT-exempt goods and services
In the EU, the VAT Directive states that certain items must be free of any VAT charges, and with others, European countries have the option to choose if certain supplies have exceptions or not.
Most of the items that don’t have a value-added tax applied to them fall into a few distinct groups.
- Goods and services that are in the public interest, like medical care and social services
- Financial and insurance services
- Certain types of land and buildings
- EU exports
Let’s take medical care as an example to illustrate how the charges are handled. The service provider will be paying input VAT on goods and services it purchases. The organisation pays input charges on its ambulances, administrative supplies, and hospital furniture and fittings. However, the service provider can’t charge VAT on the final service it offers, which is medical care. As a result, the final price charged to the customer, the patient in this instance, includes a hidden value-added tax charge that isn’t accounted for.
Businesses offering goods of significant public interest can’t charge any value-added tax, and they also cannot deduct or recover their input charges. However, these offerings are mostly VAT-exempt when offered by public institutions and only in some cases when private institutions or charities provide them. For more information about the treatment depending on the item, check out this page.
Difference between zero-rating and exemptions
There are common misconceptions between zero-rating and exemptions, and to clear these doubts, it’s important to understand the different types of items with exceptions.
- Items without the right to deduct (e.g. most public goods and services)
- Items with the right to deduct (e.g. exports and intra-EU sales)
- Other exemptions (e.g. certain imports and intra-EU acquisitions)
The previous scenario involving medical care falls into the first category, where the medical service provider couldn’t reclaim its input VAT or charge any tax.
Confusion between exempted goods and zero-rated goods comes in with the second category. On certain items such as EU exports and intra-EU supplies, businesses are not allowed to charge a value-added tax at the final point of sale, but they can recover some of the input tax they incur during production.
Looking at an export, a British firm could sell a product to a Malaysian business. As a principle, EU businesses don’t charge VAT on the final sale, but firms can reclaim tax paid on their purchases to ensure parity with external competition. These transactions get incorrectly classified as zero-rated because the final product won’t have a hidden tax.
An actual zero-rated item is one that can have a value-added tax charged to it at the final sale, but the end customer is charged a rate of 0% because of different regulations in various countries. In the UK, for example, food products and children’s products come under this group. Both VAT-exempt goods with the right to deduct and zero-rated goods don’t have a hidden final tax, but you can’t apply any charge to the former while you can with the latter.
For more information about items with the right to deduct, look through these European Commission guidelines.
This final set of exemptions apply to intra-EU purchases and imports from outside the European Union to ensure fairness in competitive markets. Under most circumstances, a business’ imports or intra-EU purchases are taxable.
However, if the domestic supply or importation of similar goods is exempt, then a business’ imports or European purchases will also be relieved from a taxation burden.
Barring some minor confusion about zero-rated goods, VAT-exempt items are those to which value-added tax is not applied at the final stage of consumption, with relative adjustments to whether input charges can be recovered depending on the item being discussed. Find more information about specific products from our Rules Map, and turn to an automated solution like VAT4U to easily identify goods and services that have exceptions and those that do not.