VAT and records
Exempt supply
An exempt supply is a sale that the VAT rules place outside VAT charging, so no VAT is added to the price. It is not taxed at 0%, which makes it different from a zero-rated supply. Whether a sale is exempt is set by the rules, not chosen by the seller.
What it means
When the VAT rules exempt a type of sale, you do not add VAT to it. That sounds the same as zero-rating, but the two are different categories: a zero-rated sale is taxable at 0%, while an exempt supply is not subject to the charge at all. The invoice shows no VAT in both cases, which is why they are easy to confuse.
The label matters because you cannot decide it at the till. A seller who treats a standard sale as exempt under-collects VAT, and one who charges VAT on a genuinely exempt sale overcharges the customer. The category can also change how input VAT on related costs is handled, so any business with an exempt line should settle the position with an accountant first.
Imagine a trading company whose accountant has confirmed that one of its product lines is exempt. On a mixed invoice the standard lines carry 15% VAT while the exempt line carries none. Because the system stores the category on each item, the clerk does not have to remember which line is which on a busy day. Whenever a new item is added, it is wise to classify it before it is sold.
In practice
- Ask your accountant whether any product or service you sell is exempt.
- Mark exempt items in your system so they are not charged 15%.
- Never treat a sale as exempt just because a customer asks for no VAT.
- Check mixed invoices show the correct VAT treatment on each line.
Questions about Exempt supply
Do I charge VAT on an exempt supply?
No. An exempt supply carries no VAT, so the price on the invoice stays free of it. You still record and invoice the sale, and ordinary supplies in the same business stay at 15%. Exempt is also not the same as zero-rated, which is taxed at 0%.
Who decides whether a sale is exempt?
The VAT rules decide, not the seller or the buyer. If you are unsure, ask an accountant or the Authority before you set up the item in your system, and write down the answer so the same treatment is applied every time. Guessing at the till can leave your VAT return wrong.
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