VAT and Partial Exemption
The VAT that a business incurs on its purchases and overheads is called ‘Input tax’. For businesses that only makes taxable supplies (either standard-rate, lower-rate or zerorate) this input tax, with the exception of certain specifically excluded items, such as business entertaining, is fully recoverable.
A VAT registered business which makes exempt sales cannot charge VAT on those exempt sales, the consequence of which is that it cannot usually reclaim the input tax it incurs on purchases and overheads used in making
those exempt supplies. If a business makes both taxable and exempt supplies it is called ‘partially exempt’.