As a rule, companies that sell goods or services must pay VAT. However, there are also exceptions where VAT is partially or even entirely waived. This article explains which of these special cases are and whether your company is also affected by such a provision.
Antonia Klatt
Last Updated on 28 June 2021
What is a VAT exemption?
Normally, the sale of goods and services is subject to VAT. In this regard, companies must register with the tax office and pay VAT in proportion to their annual revenues. However, there are also cases where the VAT obligation is partially or completely waived for various reasons.
This can be a complete or partial VAT exemption and taxation at the 0% tax rate. These special regulations only come into force in certain exceptional cases. The VAT exemption has advantages and disadvantages for the company.
VAT exemption form
Companies that are fully exempt from VAT do not need to register with the tax office and do not have to pay VAT. On the one hand, this eliminates the obligation to file a VAT return, but also the right to deduct one’s own business expenses from the tax.
The complete exemption from VAT may have several reasons. In most cases, such businesses exclusively sell goods or services that have been exempted from VAT by the state for various reasons. Likewise, businesses that are classified as small businesses due to their annual turnover are also fully exempt from VAT.
Small businesses
Since February 18, 2020, a regulation for the protection of small businesses has been in force in the EU. The enacted law is intended primarily to facilitate the entry of young companies into the respective business field and to remove the initial hurdles of the market. One of the measures developed for this purpose provides for VAT exemption for these companies.
The Europe-wide regulation sets a uniform threshold of EUR 85,000 for this purpose (GBP 85,000 in England). If the annual turnover of a trade exceeds this threshold, the company no longer counts as a small business and is therefore obliged to make VAT payments.
Furthermore, as of February 18, 2020, companies are also exempt from VAT on foreign transactions as long as they are considered a small business in their home country, their annual turnover in the respective country does not exceed the EUR 85,000 limit, and they do not earn more than EUR 100,000 annually in the entire EU.
Disability VAT exempt
In addition to the products of small businesses, goods and services for people with impairments are also completely exempt from VAT. These are products for people with mental and physical disabilities, as well as for people suffering from chronic ailments and long-term illnesses.
The following items are exempt from VAT:
- Adjustable hospital beds
- Stairlifts
- Wheelchairs
- Various medical equipment
- Vehicles for special transport (leasing or purchase)
- Furnishing articles for the disabled
The following services are also fully exempt from VAT:
- Conversion work to make the home handicapped accessible (wider doors, ramps, etc.)
- Care services approved by the appropriate office
Selected products and services
In addition to goods and services for impaired persons and ill persons, there are other categories of products that are considered essential by the state and therefore have been completely exempted from VAT. These include:
- Insurances
- Financial and credit services
- Vocational training
- Fundraising
- Income from charitable organizations
- Subscriptions from member organizations
- Sale or lease of commercial land and buildings (note: this right may be waived by the buyer / tenant if needed)
Partly VAT exempt business
Only companies that exclusively sell VAT-exempt products are fully exempt from VAT. However, there are also companies that, for various reasons, only partially meet the strict requirements for VAT exemption. These companies are considered partially VAT-exempt.
The accounting of these companies is often somewhat more complicated, as they have to list separately the sales that are exempt from VAT and the transactions that are subject to VAT. Of course, the tax office requires registration and regular submission of VAT returns with subsequent payment for the part of the transactions subject to VAT.
Mixed sales
Some companies not only focus on the distribution of VAT-exempt products, but also sell goods and services that fall under the reduced or normal tax rate. In this case, the respective company is obliged to report this part of the business activity to the tax office and pay VAT on it.
If a business sells only items that are taxed at a reduced rate, it is not a partially VAT-exempt business. These goods and services are to be treated as normally subject to VAT.
Zero VAT rate
The sale of goods that are subject to the “zero” tax rate can be described as a kind of VAT exemption. The sale of these items works similarly to the sale of VAT-exempt goods, but with a significant advantage.
Companies that exclusively sell goods subject to the 0% tax rate are free to decide whether or not to deregister with the tax office. This is not possible for companies that sell items that are completely exempt from VAT. The companies that trade products taxed at the 0% tax rate can therefore assess for themselves whether the advantages or disadvantages of deregistration outweigh the disadvantages in their particular case.
The following product groups are subject to the 0% tax rate:
- Children’s clothing
- Books (except e-books)
- Prescription drugs
- Food (exceptions excluded)
- Goods donated by charitable organizations
Advantages and disadvantages of VAT exemption
For companies that are faced with the decision to be exempt from VAT, it is important to know the corresponding advantages and disadvantages, because each company must weigh for itself which way is best for it.
In addition to the obvious financial benefit, the entrepreneur must also consider aspects such as the possible loss of integrity that can occur once one is no longer registered as a company with the tax office.
Advantages
The main advantage of a VAT exemption is certainly the elimination of VAT payments. In addition to the obvious financial relief, many processes within the company that deal with tasks related to tax returns and accounting can also be discontinued. Small companies in particular are thus immensely relieved. Time-consuming activities such as preparing a VAT return can also be avoided.
Small companies can also offer their goods and services cheaper or with a higher profit margin, as VAT does not have to be included in the sales price.
Disadvantages
However, the VAT exemption also has downsides. By deregistering with the tax office, the company no longer has the option of reclaiming the VAT on its own operating expenses from the tax office. This causes additional costs, which companies with a high purchasing volume in particular should not underestimate.
In addition, there is a risk that your company will lose customers after the VAT exemption. Especially large customers often turn away from companies that are not subject to VAT, because they consider them too small or unserious.
VAT exemption certificate
As a rule, a VAT-exempt company also does not pay VAT on the products or services it purchases itself. In order to make this possible, a certificate must be deposited with the relevant supplier that proves the legitimate VAT exemption of the respective company. This also applies to companies that sell goods at 0% tax rate.
The certificate must be issued separately from the order form or the corresponding invoice. The certificate is subject to a strictly defined form only if the purchased products are goods or services for the construction sector, which are subject to the 0% tax rate.
Conclusion
It is possible in various cases to exempt your business from VAT. This process has many advantages, but also some disadvantages. Each company owner must individually weigh and find out whether the choice of a VAT-exempt business field and thus a deregistration with the tax office is the right step for his company.
