A business makes only exempt supplies, such as insurance. What is the effect on its VAT position?
Answer and explanation
Correct answer: C. It cannot charge VAT on its sales and generally cannot recover VAT paid on costs related to those sales
- Step 1: Exempt supplies are outside the VAT charge.
- Step 2: Because no taxable supplies are made, input VAT related to the exempt supplies is generally irrecoverable.
Answer
It cannot charge VAT on its sales and generally cannot recover VAT paid on costs related to those sales.
Why not the others: It does not charge VAT on exempt supplies. Charging 0% would be a zero-rated supply, which allows input VAT recovery. The reduced rate of 5% applies only to certain taxable supplies, not to exempt supplies.
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