Some businesses provide both taxable and exempt services. This is common in sectors like finance, education, property, and healthcare.

If you supply both, you are considered partially exempt — meaning you can only reclaim some of the VAT you pay on expenses.

How it works:

• You can reclaim VAT on purchases related to taxable supplies
• You cannot reclaim VAT related to exempt supplies
• For shared costs (e.g., rent, utilities, software), you use a partial exemption calculation to work out what percentage of VAT you can reclaim

Annual Adjustment
At the end of your VAT year, HMRC requires you to recalculate your figures to ensure you reclaimed the correct amount. If you’ve reclaimed too much, you repay it. If you reclaimed too little, you can adjust and claim more back.

Key point for business owners:
Partial exemption rules are detailed — and errors can lead to HMRC penalties, so it’s important to maintain good records or work with an accountant.