Many businesses deal in goods and services that are taxable at every stage of production and transaction. Value-added tax or VAT is applied to such goods, and the goods are taxable in the accounting and tax domains. On the contrary, some enterprises choose to deal in goods and services that are completely out of the scope of VAT and are not subject to any VAT rates. Such companies are known as VAT-exempt businesses. However, have you seen a company dealing in both? That company or business is known as a partially exempt business. We will explain VAT partial exemption in this article. Keep reading to know more!
What is VAT Partial Exemption?
Companies dealing in goods or services that are partially exempted or out of the VAT scope are known as partially exempt businesses. The entire process is known to be VAT partial exemption. Non-taxable goods are not charged for VAT since they are totally exempt from the scope. At the same time, taxable goods are VATable at each stage of the supply chain.
When it comes to partially exempt goods and services, it incorporates both taxable and non-taxable goods and services. Partially exempt businesses should apply for VAT registration if their sales cross the VAT threshold. These insights are hard to learn with taking a professional and best VAT consultancy in Dubai on board.
Once you have registered the firm, you can reclaim the VAT on taxable goods from the government. However, you cant reclaim VAT paid on non-taxable or exempt items. Business entities should keep these points in mind when playing with the tax and VAT cards.
What are the Benefits of VAT Partial Exemption?
Being a partially exempt business, you can enjoy various perks and benefits. However, you will not be free of its consequences which we will discuss in the next portion. Below are a few benefits that will come to your door if you are a partially exempt business.
i) VAT registration:
The first advantage of the list is that you will have the option for VAT registration. Since VAT registration has numerous benefits, you will be exposed to all these. Moreover, you can have the option of not applying for the registration as soon as you don’t cross the VAT threshold.
ii) VAT reclaims:
As a partially exempt business, you can reclaim the VAT you paid on taxable goods and services. You can enjoy tons of money recovered if you deal more in taxable goods and less in non-taxable items. However, it is only possible when your business is VAT registered.
iii) Expanded business options:
You can have the option to buy from and sell to businesses you want. With expanded business options, your business stands the chance of choosing your buyers and sellers, making your business process easier and simpler.
What are the Drawbacks of VAT Partial Exemption?
No doubt you will enjoy the benefits mentioned above of your status; it will open the doors to several drawbacks as well. You need to deal with these issues one way or the other. Let us walk through the drawbacks quickly!
i) More paperwork:
You will need to manage a bulk of paperwork associated with tracking, calculating, and preparing VAT reclaiming files. You can well-manage it when you join hands with the best VAT consultancy. Consider hiring them to resolve this issue!
ii) Adverse effect on your loyal customers:
If a business is paying VAT on taxable goods (Input VAT), it eventually adds the amount in consumer price (Output VAT). An increase in the price may have an adverse effect on your loyal customer base.
iii) Disturbed cashflow:
Partially exempted businesses need to reclaim VAT in a specific period and before that. If you have charged more input VAT than reclaimed output VAT, you will have a disturbed cash flow for a specific accounting period.
iv) Separation of taxable items from non-taxable:
Since partially exempted businesses deal in both taxable and non-taxable items, they must separate the two categories. VAT reclaims can only be possible if the two categories are separated, which can take more time than could have been productively used.
How can Partially Exempt Businesses Calculate VAT?
Partially exempt businesses cant fully recover their VAT; however, they need to calculate and file the numbers. These businesses need to put their input VAT into one of the following categories for calculating VAT.
- Residual input tax
- Directly attributable exempt input tax
- Directly attributable taxable input tax
Streamline your VAT activities with expert consultancies!
Understanding and executing VAT concepts in businesses is never easy. You cant do well without taking professional consultants on board. With them on your side, you can enjoy streamlined and transparent business operations. Consider hiring them today to make your VAT activities more aligned and transparent.