What are exempt supplies?

Exempt supplies refer to those goods and services that are not subject to VAT, meaning that no output VAT is charged on their sale. This can include a variety of items and services such as certain financial services, education, and healthcare, among others. Since these supplies are not taxable, businesses that provide exempt supplies cannot reclaim the input VAT they have incurred on their purchases related to these supplies, which can affect cash flow and VAT recovery options.

The choice that states exempt supplies as not taxable supplies with no output VAT charged aligns perfectly with this definition. It captures both the essence of what exempt supplies are and the absence of VAT obligations on their sale.

In contrast, the other options misrepresent the nature of exempt supplies. For example, goods and services that have a VAT rate of 5% do not fall under the category of exempt supplies but rather are categorized as reduced-rated supplies. Taxable supplies that allow input VAT to be reclaimed refer to standard-rated or reduced-rated supplies, whereas exempt supplies specifically denote those for which no reclaim can occur. Lastly, goods and services taxed at 20% are standard-rated supplies and do not represent exempt supplies, as they do incur output VAT.