Most exempt supplies are examples of ‘exemptions without the right to deduct’, i.e. supplies in respect of which the input VAT incurred in the prior production and distribution processes preparatory to making that supply cannot be deducted.
These exemptions can conveniently be divided into two classes:
- Exemptions in the public interest (e.g. medical and dental services)
- Exemptions for other activities (e.g. financial and insurance services)
Exemption for activities in the public interest
What is exempt?
EU countries must exempt certain transactions that are considered to be in the public interest.
They are mostly carried out by public bodies but exemption also extends to several of the same transactions when carried out in the public interest by bodies in the private or charitable sector.
Case 1 Postal services
Transaction exempt | Exceptions |
|---|---|
A: Supply of services and incidental goods by the public postal services B: Supply at face value of postage stamps, fiscal stamps and other similar stamps | Exemption does not apply to:
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Case 2 Medical services
Transaction exempt | When carried out by |
|---|---|
| A: Hospital and medical care and closely related activities |
where carried out under comparable social conditions, also by:
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| B: Medical care |
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| C: Supply of staff for the purposes of transactions under Point B with a view to spiritual welfare |
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D: Supply of human organs, blood and milk |
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Case 3 Dental services
Transaction exempt | When carried out by |
|---|---|
| A: Dental technicians’ services |
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B: Supply of dental prostheses |
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Case 4 Welfare and social services
Transaction exempt | When carried out by |
|---|---|
A: Services and goods closely linked to welfare and social security work (including those supplied by old people’s homes) |
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B: Supply of staff for the purposes of transactions under Point A with a view to spiritual welfare |
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Case 5 Children’s and young people’s services
Transaction exempt | When carried out by |
|---|---|
A: Services and goods closely linked to the protection of children and young people B: Supply of staff for the purposes of transactions under Point A with a view to spiritual welfare |
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Case 6 Education
Transaction exempt | When carried out by |
|---|---|
A: Providing education to children or young people D: Services and goods closely related to A, B or C |
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| E: Supply of staff for the purposes of transactions under Points A, B, C or D with a view to spiritual welfare |
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F: Private tuition covering school or university education |
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Case 7 Sport and physical education
Transaction exempt | When carried out by |
|---|---|
| Services closely linked to sport or physical education supplied to persons taking part in those activities | Non-profit-making organisations (Article 132(1)(m) VAT Directive) |
Case 8 Cultural activities
Transaction exempt | When carried out by |
|---|---|
| Cultural services and closely linked goods |
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Case 9 Ambulances and similar transport
Transaction exempt | When carried out by |
|---|---|
| Transport services for the sick or injured in specially adapted vehicles | Bodies authorised for the purpose |
Case 10 Public broadcasting
Transaction exempt | When carried out by |
|---|---|
| Non-commercial activities | Public radio and television broadcasting organisations (Article 132(1)(q) VAT Directive) |
Case 11 Member services of non-profit-making organisations
Transaction exempt | When carried out by |
|---|---|
| Supply of services and closely related goods to their members in their common interest in return for a fixed subscription | Non-profit-making organisations of a:
Provided that this is not likely to distort competition (Article 132(1)(l) VAT Directive) |
Case 12 Fund-raising events
Transaction exempt | When carried out by |
|---|---|
| Supply of services and goods in connection with fund-raising events exclusively for their own benefit | Organisations whose activities are exempt by reason of Cases 2, 4, 5, 6, 7, 8 or 11 Provided that this is not likely to distort competition (Article 132(1)(o) VAT Directive) |
Case 13 Cost sharing
Transaction exempt | When carried out by |
|---|---|
| Services rendered to their members and directly necessary for carrying out the activity concerned | Independent groups of persons carrying on:
(Article 132(1)(f) VAT Directive) |
May any of these exemptions be restricted any further?
Yes. EU countries may choose to impose further conditions in certain cases, as follows:
- Case 12: Any restrictions they feel necessary, such as the number of fund-raising events or the amount of receipts from such events.
- Cases 2, 4, 5, 6, 7, 8 and 11: Except as regards public bodies, exemption may be made dependent on one or more of the following conditions:
- no systematic aim to make a profit;
- management and administration on an essentially voluntary basis;
- prices charged must be approved or lower than the going commercial rate;
- the exemptions must not be likely to cause distortion of competition.
In addition, the supply of goods and services closely linked to these transactions must not be exempted where
- it is not essential to the exempt transaction; or
- where its basic purpose is to obtain additional income for the body concerned through transactions in direct competition with those of commercial enterprises subject to VAT.
For full details, see Articles 132(2), 133 and 134 VAT Directive.
Exemptions for other activities
Other supplies that must be exempt, without the right to deduct associated input VAT, are listed in Article 135VAT Directive and consist of a diverse range of transactions, many of which are associated with money and finance.
In these pages, we shall consider separately:
- Financial and insurance services
- Transactions involving immovable property
- Gambling
- Miscellaneous other transactions
Financial and insurance services
The majority of financial and insurance services have historically been exempted from VAT, although the EU Commission has proposed simplifying and clarifying the scope of the exemption under this head.
- What financial and insurance services are exempt?
- The option to tax certain financial services
- Proposals for change
What financial and insurance services are exempt?
Case 1 Insurance and reinsurance
Exempt transaction | Includes | |
|---|---|---|
Insurance and reinsurance transactions(Article 135(1)(a) VAT Directive) | Related services carried out by insurance brokers and insurance agents | |
Case 2 Granting and negotiation of credit
Exempt transaction | Includes | |
|---|---|---|
The granting and negotiation of credit(Article 135(1)(b) VAT Directive) | The management of credit by the person granting it | |
Case 3 Guarantees and security
Exempt transaction | Includes | |
|---|---|---|
The negotiation of or any dealings in:
(Article 135(1)(c) VAT Directive) | The management of credit guarantees by the person granting the credit | |
Case 4 Cashless transactions
Exempt transaction | Includes | Excludes |
|---|---|---|
Transactions concerning:
| Negotiation of all of these | Debt collection |
Case 5 Cash transactions
Exempt transaction | Includes | Excludes |
|---|---|---|
Transactions (including negotiation) concerning:
Coins used as legal tender | Negotiation of all of these | Collectors’ items, i.e.
not normally used as legal tender, or
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Case 6 Transactions in shares etc
Exempt transaction | Includes | Excludes |
|---|---|---|
Transactions in:
(Article 135(1)(f) VAT Directive) | Negotiation of all of these | Management of all of these and safekeeping
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Case 7 Investment funds
Exempt transaction | Type of fund | |
|---|---|---|
The management of special investment funds | As defined by each EU country | |
Is there a right to deduct associated with transactions in Cases 1 to 7?
No. These are transactions without the right to deduct the associated input VAT.
But see Theoption to tax certain financial services.
The option to tax certain financial services
EU countries may choose to allow business to opt to tax the transactions mentioned in Cases 2 to 7.
What does the option to tax involve?
Because the transactions in Cases 2 to 7 (and also Case 1 ) are exempt without the right to deduct, financial and insurance institutions and other persons carrying out those transactions cannot recover VAT they incur on their purchases of associated goods or services.
EU countries choosing to allow the option will set the detailed rules for its application and restrictions relating to it. See further under Proposal for a Directive .
Is the option available for Case 1 transactions?
No.
Proposals for change
Proposed update of the legislation
In 2007 the Commission proposed a Directive to update the rules for financial and insurance services.
As there was no prospect of adoption by the EU Council, the Commission in 2016 withdrew this proposal.
Why update?
To modernise and simplify the rules (dating from 1977) and ensure they are consistently applied across the EU.
Current problems with the rules
- Extra costs to business
Because financial and insurance services are exempt without the right to deduct, financial and insurance institutions and other suppliers of such services cannot recover VAT on their purchases of services or goods (e.g. outsourced services or computers).
They then pass on this cost to their customers, who also cannot recover it, so this ‘hidden VAT’ cascades through the system increasing operating costs for EU business. - Inconsistent application
The exemption is not applied uniformly across EU countries and so frequently the Court of Justice has been asked to fill the legislative gap and clarify the correct interpretation.
Specifics of the proposal
- Redefining what is exempt
To reflect changes in the industry. A Regulation to this effect would apply directly in all EU countries.
This would increase legal certainty for all concerned (business and national tax administrations) and reduce their administrative burden. - Option to tax (for banking & insurance companies, etc)
This already exists in Article 137 of the VAT Directive but is currently at the discretion of national governments and not widely used.
Making it mandatory would allow (i) firms to reduce their exposure to non-recoverable tax (in particular in B2B activities) and (ii) their clients to deduct the VAT they pay them. - VAT exemption on cost-sharing arrangements, including those with firms in other EU countries.
This would enable firms to pool their operations and share costs between the group members without creating additional non-recoverable VAT.
Background
- Commission background paper
- FAQs
- Impact assessment (summary)
- Impact assessment (full version)
- IBFD report (2007)
- Tax calculation account report
- Public consultation (2006)
- Price Waterhouse Coopers report (2006)
Transactions involving immovable property
A number of transactions involving land and buildings are exempt without the right to deduct, although it is open to EU countries to allow taxable persons (businesses) to choose to subject such transactions to tax.
Exempt transactions in immovable property
Case 1 Buildings and the land on which they stand
Exempt transaction | Exclusions |
|---|---|
The supply of a building (or parts of a building) and the land on which it stands(Article 135(1)(j) VAT Directive) | Such supplies taking place before the building is first occupied (Articles 135(1)(j), 12(1)(a) VAT Directive) |
Case 2 Land that has not been built on
Exempt transaction | Exclusions |
|---|---|
The supply of land that has not been built on (Article 135(1)(k) VAT Directive) | The supply of building land (Articles 135(1)(k), 12(1)(b) VAT Directive) |
Example 1 A developer sells vacant land with planning permission (the permission to construct e.g. an office building) to a builder. |
Case 3 Leasing or letting
Exempt transaction | Exclusions |
|---|---|
The leasing or letting of immovable property (Article 135(1)(l) VAT Directive) |
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Example 2 | |
Example 3 | |
Example 4 |
The option to tax transactions in immovable property
Because the transactions in Cases 1, 2 and 3 are exempt without the right to deduct, lessors, businesses and other persons carrying out those transactions cannot recover the VAT they incur in order to carry them out. This may in turn lead to increased costs for their customers as the suppliers may seek to compensate for this irrecoverable VAT.
With this in mind, the VAT Directive provides that EU countries may give taxable persons (businesses) the right to opt to tax all or certain Case 1, 2 and 3 transactions that would otherwise be exempt. This would have the result, for example, that VAT was charged on rents. If the customer is a business making taxed supplies, it should be able to deduct the VAT charged in this way and so not to have bear any extra cost as a result.
EU countries that allow for the option to tax may restrict the scope of the right as they choose and are responsible for setting the detailed rules governing the exercise of the option.
Gambling
The provision of betting, lotteries and other forms of gambling is a transaction that is exempt without the right to deduct.
It is up to individual EU countries to decide whether all forms of gambling are exempt or only some but the principle of fiscal neutrality must be respected. EU countries can set their own conditions and limitations on this exemption.
| Example A customer places a bet on Spain to win the football World Cup 2014 in a betting shop. The bet is exempt from VAT. |
Article 135(1)(i) VAT Directive.
Miscellaneous other exempt transactions
Miscellaneous other exemptions
The following are further examples of transactions that are exempt without the right to deduct.
Case 1 Goods used exclusively for exempt supplies
Exempt transaction | Exempt activities |
|---|---|
The supply of goods used exclusively for the listed exempt activities (Article 136(a) VAT Directive) |
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Case 2 Goods on which VAT is not deductible
Exempt transaction | Reason for non-deduction |
|---|---|
The supply of goods on the acquisition or application of which VAT is not deductible (Article 136(b) VAT Directive) |
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