Do exempt sales count towards the VAT threshold?

I was on a call recently with a client who runs a gold bullion and jewellery business, and I was talking him through whether he actually needs to register for VAT.

Here's the bit that trips people up: not all your sales are subject to VAT.

Which sales count towards the VAT registration threshold?

HMRC's guidance says you must register if your total taxable turnover for the last 12 months goes over £90,000, or if you expect it to go over £90,000 in the next 30 days. Taxable turnover is the total value of everything you sell that is not VAT exempt or outside the scope of VAT.

That definition works in both directions. Exempt sales are left out. Zero-rated and reduced-rated sales are taxable supplies, so they are counted alongside the standard-rated ones. VAT Notice 700/1 describes taxable turnover as the total value of all the taxable supplies you make, including the zero-rated ones, and says you do not need to include exempt supplies or capital assets you have sold, such as buildings, equipment or vehicles.

Is gold bullion exempt from VAT?

In my client's case, investment-grade gold bullion is an exempt supply for VAT purposes, but jewellery sales are standard-rated at 20%.

HMRC's VAT Notice 701/21 says investment gold is exempt from VAT, subject to an option to tax that is open to certain businesses. It defines investment gold as gold of a purity of not less than 995 thousandths in the form of a bar or wafer of a weight accepted by the bullion markets, together with certain gold coins. The same notice says other supplies of gold remain taxable at the standard rate, apart from certain transactions between central banks and on the London Bullion Market.

What does that look like with numbers?

So say your total turnover is £100k, but £80k of that is exempt sales and £20k is standard-rated sales.

You're actually below the £90k threshold and don't need to register, even though total turnover is well over it.

On HMRC's definition, the taxable turnover in that example is £20,000, because the £80,000 of exempt sales is left out of the calculation.

A gold business has one more thing to watch. Where gold is bought under the special accounting scheme for gold, Notice 701/21 says the value of those business purchases is added to the other taxable supplies you make when you work out whether you are liable to register.

What if you register when you did not need to?

Get this wrong the other way, and you could end up registering unnecessarily and charging VAT to clients when you never needed to in the first place.

Registering below the threshold is allowed. HMRC calls it voluntary registration, and its guidance says you must pay HMRC any VAT you owe from the date they register you.

A business with mixed sales also has a recovery question. VAT Notice 700/1 says that if you are registered and some of the supplies you make are exempt, you may not be able to get back all the VAT you have been charged on things you bought for the business. Those are the partial exemption rules. If all your supplies are exempt, the notice says you will not be able to register for VAT at all.

How do you check your own position?

If your business has a mix of exempt and standard-rated supplies, it's always worth checking exactly what counts towards the threshold before assuming your total turnover is the number that matters.

The test is a rolling one. VAT Notice 700/1 says you are liable to register if, at the end of any month, the value of your taxable supplies in the previous 12 months or less is over the threshold, and you then have 30 days from the end of that month to tell HMRC.

For how VAT works once you are registered, see VAT for agencies. If you do register, reclaiming VAT you paid before you registered covers what can be claimed back. Gold has its own Capital Gains Tax rules too, covered in is gold exempt from Capital Gains Tax.

VAT thresholds and the liability of particular goods change, and whether a sale is exempt depends on exactly what is being sold, so this is general information rather than advice on your own sales. If you want your turnover checked against the threshold, see how we work or talk to us.