Is Your Business at Risk? Understanding "Mixed Supply" VAT

For many businesses, the distinction between zero-rated and exempt supplies under the VAT system can be confusing. Although neither results in VAT being charged to the customer, the difference has significant implications for how businesses recover the VAT paid on their expenses.

Understanding this distinction is not only important for tax compliance—it can also have a direct impact on your business's profitability and cash flow.

The Defining Principle: Taxable vs. Non-Taxable Supplies

The key difference lies in how the VAT Act classifies these supplies.

Zero-Rated Supplies

Zero-rated supplies are still considered taxable supplies, but they are taxed at a VAT rate of 0%.

Because they remain part of the taxable VAT system, businesses are entitled to claim the input VAT paid on goods and services used to make these supplies.

Exempt Supplies

Exempt supplies are classified as non-taxable supplies and fall outside the VAT system. Businesses making only exempt supplies cannot claim input VAT on the purchases made to provide those supplies.

Why This Matters

The biggest consequence of this distinction relates to input tax—the VAT paid by a business on its purchases.

• Businesses making zero-rated supplies can recover the VAT incurred on qualifying purchases.

• Businesses making only exempt supplies cannot recover any input VAT.

  
  

Understanding this distinction is essential for maintaining compliance and ensuring your business does not lose valuable VAT deductions.

The Complication: Mixed Supplies

Many businesses do not make exclusively taxable or exempt supplies. Instead, they provide a combination of both, commonly referred to as mixed supplies.

Where a business makes both taxable (including standard-rated and zero-rated) and exempt supplies, it cannot simply claim all of its input VAT—or none of it.

Under the VAT Act, a registered person making both taxable and exempt supplies must apportion their input VAT claim.

How Input Tax Is Treated

Input VAT is generally treated in one of three ways.

1. Directly Attributable to Taxable Supplies

Input VAT incurred on purchases used exclusively to make taxable supplies may be claimed in full.

2. Directly Attributable to Exempt Supplies

Input VAT incurred on purchases used exclusively to make exempt supplies is not deductible.

3. Shared or Overhead Costs

Where expenses relate to both taxable and exempt activities—such as rent, electricity, office expenses, or other general overheads—the input VAT must be apportioned between taxable and exempt activities.

The "90% Rule" Exception

The VAT Act provides an important exception to the apportionment requirement.

If more than 90% of a VAT-registered person's total turnover during a tax period is derived from taxable supplies, the business may recover all of its input VAT without performing an apportionment calculation.

This rule simplifies VAT administration for businesses where exempt supplies make up only a small portion of their activities.

A Simple Rule of Thumb

Zero-Rated Supplies

• No VAT is charged on sales.

• Input VAT on purchases can be claimed.

• Businesses benefit from recovering VAT while not charging VAT to customers.

  
  

Exempt Supplies

• No VAT is charged on sales.

• Input VAT on purchases cannot be claimed.

• Input VAT becomes part of the business's operating costs.

  
  

Mixed Supplies

• Input VAT must generally be apportioned.

• Businesses may only claim the portion of input VAT relating to taxable supplies, unless the 90% rule applies.

  
  

Final Thoughts

Correctly distinguishing between zero-rated, exempt, and mixed supplies is critical for accurate VAT reporting and avoiding unnecessary tax costs.

If your business provides a combination of taxable and exempt supplies, reviewing your VAT treatment regularly can help ensure compliance while maximising legitimate input VAT claims.