What is VAT Exempt? VAT Exempt Items in the UK for 2025

VAT exemption in the United Kingdom applies to specific goods and services that fall outside the scope of Value Added Tax under the UK VAT Act 1994 and HMRC Notice 701 series.

In the 2025 tax year, exempt sectors include healthcare under the NHS, private education and training, financial services and insurance services regulated by the FCA, and Royal Mail postal services.

Unlike zero-rated supplies, VAT-exempt transactions prevent businesses from reclaiming input VAT, directly influencing cash flow, pricing strategy, and taxable turnover calculations.

For UK businesses, identifying exempt items under HMRC guidelines is essential for accurate VAT returns, compliance with Making Tax Digital (MTD), and strategic tax planning.

Our UK Tax Advisory team provides detailed insights into exempt categories and explains how these rules differ from zero-rated goods to safeguard profitability and ensure compliance.

Defining What is VAT Exempt

When a supply of goods or services is designated as VAT exempt, it means that the supply is outside the scope of VAT and is therefore not subject to the tax.

Key Definition: A supply is VAT exempt if it falls under specific categories detailed in UK VAT law (primarily Schedule 9 of the Value Added Tax Act 1994).

For an item or service to be VAT exempt, the seller must not charge VAT on the sale, and, critically, they cannot reclaim any of the input VAT they paid on costs related to making that exempt supply. This inability to reclaim input tax is the single most important characteristic defining what is VAT exempt.

The Crucial Distinction: VAT Exempt Items vs. Zero-Rated Items

This is the most common point of confusion for businesses. While both result in no VAT being charged to the end customer, their treatment in a business’s VAT return is completely different:

Feature	VAT Exempt Items and Services	Zero-Rated Items and Services
VAT Charged to Customer	0% (It is not a taxable supply)	0% (It is a taxable supply at a rate of 0%)
Input VAT Recovery	NO. Input VAT on related costs cannot be reclaimed.	YES. Input VAT on related costs can be reclaimed.
Impact on Business Cost	Increases costs, as the business absorbs the unrecoverable VAT.	Reduces costs, as the business can fully recover the input VAT.
Inclusion in VAT Threshold	Does NOT count towards the £90,000 VAT registration threshold.	DOES count towards the £90,000 VAT registration threshold.

For example, a business selling VAT-exempt items (like insurance) that buys £100 worth of standard-rated office supplies (with £20 VAT) must absorb that £20, making the real cost £120.

A business selling zero-rated items (like children’s clothing) would reclaim the £20, making the real cost £100. This distinction is vital for understanding what is VAT-exempt and its effect on a business’s bottom line.

Categorisation of Principal VAT Exempt Items 2025

The categories of supplies that are VAT exempt are typically essential services where the government seeks to avoid taxing the consumer, or sectors where calculating the value-added element is structurally complex.

This list reflects the known status for 2025, with notes on impending changes.

1. Land, Property, and Construction

The grant of an interest in land or a building is generally VAT-exempt. This is an area of significant complexity, with numerous exceptions and special rules:

• Residential Rent: The letting of residential property is typically VAT-exempt.
• Commercial Property: The sale or letting of commercial property is also generally VAT exempt.
• Opting to Tax: Crucially, a landlord of commercial property can “Opt to Tax” the property. This voluntary election waives the exemption, making the supply standard-rated (20% VAT). The incentive for the landlord is the ability to reclaim input VAT on the building’s construction, refurbishment, and maintenance costs.

2. Financial and Insurance Services

Financial services are broadly defined and almost universally treated as VAT-exempt items in the UK, as determining the value added in these transactions is often impractical.

• Insurance: The provision of insurance and reinsurance services by an insurer, and the arrangement of these services by an intermediary, are VAT exempt.
• Banking: Interest on loans, credit card services, operating bank accounts, and transactions concerning money transfers, payments, and securities (shares/bonds) are all generally VAT-exempt items. This includes the underlying service, but specific charges (e.g., late payment fees) may be standard-rated.

3. Health and Welfare Services

The aim here is to keep essential health services affordable by ensuring they are VAT-exempt.

• Medical Care: The provision of medical care and treatment by doctors, dentists, nurses, and other health professionals registered under the appropriate UK law is VAT-exempt. This covers core services provided in a hospital, clinic, or other private healthcare setting.
• Welfare: Welfare services provided by charities or state-regulated private welfare institutions, such as care for the elderly, disabled, or children, are typically VAT-exempt.

4. Education and Training

This is a critical area, especially for 2025, due to planned legislative changes. The provision of education is generally VAT exempt when supplied by an eligible body.

• Eligible Bodies: This includes universities, colleges, and schools providing statutory or further/higher education.
• 2025 Update: Private School Fees: A major change effective from late 2024 or early 2025 is the planned removal of the VAT-exempt status on private school fees. This means that, subject to final legislation, private school fees will become subject to the standard 20% VAT rate, which has significant implications for schools and parents alike. Other forms of education (such as higher education or approved vocational training) often retain their VAT-exempt status.

5. Betting, Gaming, and Cultural Services

• Betting & Gaming: The provision of facilities for betting, bingo, lotteries, and gaming is generally VAT exempt. This means the stakes placed are not subject to VAT.
• Cultural Services: Admission charges for certain cultural events and venues are VAT exempt when the supplies are made by an eligible public body (like a public museum or art gallery).

The Hidden Cost: Partial Exemption and the VAT Exempt Business

When a business only makes supplies of VAT-exempt items, it cannot register for VAT and cannot reclaim any input VAT.

When a business makes a mix of taxable supplies (standard-rated, reduced-rated, and zero-rated) and VAT-exempt supplies, it becomes partially exempt. This introduces significant administrative complexity:

1. Direct Costs: Input VAT directly related to standard-rated or zero-rated sales can be fully recovered. Input VAT directly related to VAT-exempt items cannot be recovered.
2. Overhead Costs: Input VAT on general business overheads (e.g., office rent, utilities, general accountancy fees) must be apportioned using a method agreed upon with HMRC (usually based on the ratio of taxable turnover to total turnover). Only the proportion relating to taxable sales can be recovered.

A business must perform this partial exemption calculation every quarter and a more precise annual adjustment. Getting this wrong can lead to serious penalties from HMRC. Therefore, understanding precisely what is VAT exempt and what is not is essential for compliance.

The Bottom Line

In the dynamic UK tax environment of 2025, a comprehensive understanding of what is VAT exempt and the accurate identification of VAT exempt items is not merely an accounting formality it is a strategic necessity.

Whether you are a private school adjusting to the removal of the VAT exempt status, a financial services provider dealing solely in VAT exempt supplies, or a mixed business managing partial exemption rules, precision in your VAT accounting is essential.

Failure to distinguish correctly between VAT exempt and zero-rated supplies can lead to significant financial leakage from unrecovered input VAT or, worse, penalties from HMRC for non-compliance.

Always consult a qualified UK VAT specialist to review your business activities and ensure all your supplies, including any potential VAT exempt items, 2025 updates, are correctly classified.

Disclaimer: The content on AccoBee.co.uk is for informational purposes only and do not constitute tax or financial advice. 

We recommend consulting a certified tax professional or the HM Revenue and Customs Dept (HMRC) for accurate guidance. AccoBee.co.uk is not responsible for any decisions made based on the information provided.