--- title: Is your business partially exempt for VAT purposes? description: Ensure your VAT returns are accurate by understanding partial exemption rules and how exempt income affects VAT recovery. image: https://blog.shorts.uk.com/hubfs/New%20Project%20(9)-2.jpg --- [![Shorts_logo_White](https://blog.shorts.uk.com/hubfs/New%20Site%202018/Shorts_logo_White.svg "Shorts_logo_White")](https://www.shorts.uk.com/) [Blogs & News](https://blog.shorts.uk.com/) > [VAT](https://blog.shorts.uk.com/topic/vat) # Is your business partially exempt for VAT purposes? Lynne Gill - 3 November 2025 ###### Select topic - Please Select - [ Audit ](https://blog.shorts.uk.com/topic/audit) [ Business Taxes ](https://blog.shorts.uk.com/topic/business-taxes) [ Radius – R&D Tax Relief & Patent Box ](https://blog.shorts.uk.com/topic/radius-rd-tax-relief-patent-box) [ Corporate Finance ](https://blog.shorts.uk.com/topic/corporate-finance) [ GENUS Management Accounts ](https://blog.shorts.uk.com/topic/genus-management-accounts) [ VAT ](https://blog.shorts.uk.com/topic/vat) [ Private Client ](https://blog.shorts.uk.com/topic/private-client) [ Payroll ](https://blog.shorts.uk.com/topic/payroll) [ EOT ](https://blog.shorts.uk.com/topic/eot) [ International Taxes ](https://blog.shorts.uk.com/topic/international-taxes) ![featured image](https://blog.shorts.uk.com/hubfs/New%20Project%20(9)-2.jpg) For many businesses, exempt income is not something they think about when completing a VAT return.  | ### Example 1: Retail business A retail business may have rental income from a flat above the shop, but this may only make up a small proportion of turnover and the expenditure associated with it may also be minimal. VAT rules allow for VAT to be reclaimed in connection with expenditure that generates exempt income, where this VAT is less than £625 per month and less than 50% of the total VAT on expenses in the period. Providing these de minimis limits are not exceeded, VAT recovery is not restricted and there is no impact on the business’ VAT return figures. | | --- |   However, what happens when there is a change in circumstances, such as the the conversion of the attic into an additional flat? One consequence could be exempt income becoming the predominant income source for a business and/or an increase in expenditure relating to the flats.   | ### Example 2: Property rental example A landlord with a property consisting of both commercial premises and dwellings (e.g., flats) will charge VAT on the rental income from the commercial premises if there is an option to tax in place. However, the rental income from the flats will be exempt. A rental holiday for the lessees of the commercial premises forced to close due to flooding, for example, could result in all the landlord’s income being [exempt from VAT](https://www.youtube.com/watch?v=yMU5_Vx0CNw). This could lead to a situation where any VAT incurred on expenditure is not reclaimable as it is not generating any taxable income. If the landlord is receiving a reduced income from commercial rent, the reclaimable VAT could still be restricted as the standard method of determining how much VAT on expenditure can be reclaimed is based on taxable income as a percentage of total income. | | --- | Examples of exempt income which may affect the amount of VAT you can reclaim are: - Sale of lottery/raffle tickets - Retailer lottery commission - Property rental income (residential property and commercial property with no option to tax) - Lease of land (if no option to tax) ## Businesses with both taxable and exempt income A business with both taxable and exempt income is required to carry out a partial exemption calculation when completing the quarterly VAT return and an annual adjustment at the partial exemption year end (i.e., the end of March, April or May depending on VAT return periods). The calculation requires VAT on expenditure to be split between purchases/expenses used to generate taxable income, those used to generate exempt income and those relating to the business as a whole, e.g., IT expenses, utility bills, [stationery](https://blog.shorts.uk.com/vat-on-books-in-the-uk). ## Review your VAT return calculations If your business receives exempt income and you are not carrying out a partial exemption calculation, it is advisable to review your VAT return calculations for past periods especially in the periods where the value of your taxable income has fallen, or exempt income has increased. Shorts have an experienced [VAT team](https://shorts.uk.com/vat-consultancy-planning/) should you have any questions or require assistance with partial exemption issues. [![Contact our VAT team today](https://no-cache.hubspot.com/cta/default/2442072/f626b63f-967c-400c-9c1c-d981f0304f6f.png)](https://cta-redirect.hubspot.com/cta/redirect/2442072/f626b63f-967c-400c-9c1c-d981f0304f6f) ![author](https://blog.shorts.uk.com/hubfs/ZT_cPBSU-1-1.jpeg) #### Lynne Gill My area of expertise is land and property transactions but I have extensive knowledge of both domestic and international VAT and I love complex VAT queries. I have an Honours degree in Business Studies and a VAT legal and technical qualification from the Institute of Indirect Taxation. [View my articles](https://blog.shorts.uk.com/author/lynne-gill) Tags: [VAT](https://blog.shorts.uk.com/topic/vat) Share this on - - - [Questions? Get in touch with us](https://www.shorts.uk.com/contact/) ###### Tax Saving Guide 2026-27 Written especially for entrepreneurs and owner-managed businesses, this guide is full of planning ideas and tax risks to avoid. [ Download now ](https://info.shorts.uk.com/en-gb/tax-saving-guide) ![Tax saving guide 2026-27](https://blog.shorts.uk.com/hs-fs/hubfs/Tax%20saving%20guide%202024.jpg?width=375&height=465&name=Tax%20saving%20guide%202024.jpg) ###### Related articles ##### [Exempt from VAT or zero-rated: what’s the difference?](https://blog.shorts.uk.com/exempt-from-vat-or-zero-rated-whats-the-difference) ##### [VAT on Private School fees - What is the latest?](https://blog.shorts.uk.com/vat-on-private-school-fees-latest) ##### [VAT on commission](https://blog.shorts.uk.com/vat-on-commission) ##### [VAT and Bank Charges](https://blog.shorts.uk.com/vat-and-bank-charges) ###### Latest articles [A case of aggressive tax avoidance: Glasgow Rangers Football Club](https://blog.shorts.uk.com/aggressive-tax-avoidance-affect-you) [What is VAT? - Complete Guide (Updated for 2025/26)](https://blog.shorts.uk.com/what-is-vat) [Ashgate Hospice Sparkle Night Walk 2026](https://blog.shorts.uk.com/ashgate-hospice-sparkle-night-walk-2026) [Stocktaking guide for UK businesses](https://blog.shorts.uk.com/stocktaking-guide-for-uk-businesses) [Supporting the Chatsworth Cascade for future generations](https://blog.shorts.uk.com/supporting-the-chatsworth-cascade-for-future-generations) [Deal of the Year win at Insider Dealmakers Awards 2026](https://blog.shorts.uk.com/deal-of-the-year-win-at-insider-dealmakers-awards-2026) [Football shirt Wednesday: Backing England in style](https://blog.shorts.uk.com/football-shirt-wednesday-backing-england-in-style) [Understanding lifetime trusts: the basics](https://blog.shorts.uk.com/understanding-lifetime-trusts-the-basics) [Close company directors face new HMRC detail requirements in 2026](https://blog.shorts.uk.com/close-company-directors-face-new-hmrc-detail-requirements-in-2026) [Shorts advise Harris Irwin Architects on successful growth funding.](https://blog.shorts.uk.com/shorts-advise-harris-irwin-architects-on-successful-growth-funding) #### About Us Use this little footer to reinforce your message about who you are and why people love working with you. 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