VAT exemption: what does it consist of?

VAT exemption: what is it

VAT exemption is technically defined as VAT not applicablebut the cumbersomeness of the definition leaves room in common language for a more streamlined terminology which is that of exemption. Non-applicability is actually the correct term because, like VAT exclusion or VAT non-taxability, VAT exemption is a form of non-applicability. In practice, VAT exemption is the term generally used when referring to operations that do not carry a VAT charge, therefore with VAT at 0%.

VAT exemption indicates the regulatory case for which certain operations are exempt from VAT charging. In other words, value added tax is zero. For exempt operations there is therefore no VAT return or supplementary VAT return according to the normal deadlines.
The exemptions have full operation and applicability in cases where one of the following is missing requirements established by the legislator: subjective, objective or territorial. The subjective requirement occurs when the economic operation is usually carried out by the natural or legal person involved in commercial, agricultural or other professional activities. The subjective requirement implies the transfer of goods or the provision of services. The territorial requirement requires that the operation be relevant in Italy.

VAT exemption: products and services involved

Non-taxable transactions concern the sale of goods or the provision of services internationally. Specifically, they include exports, activities similar to export operations, international exchanges and related services, supplies aimed at non-EU travellers, activities carried out with San Marino and Vatican City, operations governed by international agreements and treaties and supplies within the European Union.

VAT exempt transactions refer to sales of goods or services expressly regulated by law, including real estate transactions and services in the healthcare, educational or cultural fields. Presidential Decree 633/1972 contains the complete list of all types of goods and services involved in the exemption. These operations are required to invoice and store VAT records to allow recovery of tax on expenses or purchases. They participate in the formation of the turnover. For exempt operations, the legislator does not allow any form of VAT deduction with debit in error, on the other hand it allows specific sanctions for the case stated.

VAT exemptions for small businesses

VAT exemptions for small businesses concern natural persons who start a business or operations related to the artistic field for which an estimated revenue equal to or less than 85 thousand euros is expected. In this case it is possible to switch to the flat-rate regime which exempts you from VAT obligations, including charging the customer and paying it into the Treasury.

Small businesses subject to tax exemptions must not have exceeded revenues or compensation exceeding 85 thousand euros and must have incurred total costs equal to or less than 20 thousand euros gross for the following types of work: accessory, employee or project-based. Included are the costs for profits from participation paid to members relating exclusively to work and the costs paid for work services carried out by the entrepreneur or one of the family members.

Tax exemption in the electronic invoice

Since the arrival of electronic invoicing, more attention has been paid to many fields that were previously little considered.
In electronic invoicing, in addition to the customer data, the supplier data, invoice number and issue date, you are asked to enter the applicable VAT value and its justification. This new field is the VAT exemption field, which must be inserted in the case of operations not reporting the VAT charge and is necessary to report on the electronic invoice the reason relating to the reasons for tax exemption of a certain commercial operation.

In the electronic invoice, once the 0% VAT to be applied has been indicated, this decision must be justified by specifying the type of inapplicability. For each type of inapplicability, there corresponds a nature code from N1 to N7which describe operations that are excluded (N1), not subject (N2), non-taxable (N3), exempt (N4), subject to the margin regime (N5), subject to reverse charge/reverse charge (N6), subject to special methods for determining/paying VAT (N7).

Specifically, non-taxable operations fall within the scope of the tax and are subject to invoicing and registration obligations, therefore they contribute to the formation of the turnover, but are not subject to VAT; while, exempt operations are not subject to payment of the tax, they contribute to forming the VAT turnover, therefore they are subject to invoicing and registration in the VAT registers and do not allow recovery of the VAT paid on purchases or expenses. Finally, the excluded transactions reflect sales of goods not subject to the tax by law or because they do not have one of the conditions necessary to be considered subject. They must not be registered in VAT accounts, they do not contribute to forming the VAT turnover and do not give the right to recover VAT from expenses or purchases.

Going into the technical details of the non-applicability of VAT, it is possible to justify your tax exemption as:

• N1 – Excluded operations: i.e. VAT exclusion for interest on non-agreed delays or arrears, goods sold as a discount, premium or rebate, for expenses in the name and on behalf of third parties through explicit agreement, for returnable packaging and for VAT reimbursement;
• N2 – Non-subject operations: i.e. for the provision of goods or services outside the EU, purchases outside the scope of VAT (i.e. tobacconist items, magazines and telephone services to the public) and invoices received from taxpayers who have made use of the subsidized schemes;
• N3 – Non-taxable operations: operations such as exports, or a transfer of goods within the EU, with reference to intra-community purchases;
• N4 – Exempt operations: such as healthcare services, educational services and gaming or betting;
• N5 – Transactions in the margin regime: i.e. invoices relating to operations for which the special regime for used goods applies, such as for example the sale of a used car, or that of publishing. Also included are invoices issued without separate indication of the tax by travel and tourism agencies;
• N6 – Reverse charge operations: concern for example Cleaning and Maintenance services;
• N7 – VAT paid in another EU state: mainly applies to distance sales or online electronic services, for example e-commerce sales.