Can businesses reclaim VAT paid on exempt supplies?

Businesses cannot reclaim VAT paid on purchases related to exempt supplies because exempt supplies do not have VAT applied to them. As a result, any associated costs incurred that would generally allow for VAT recovery become non-recoverable. Exempt supplies include goods and services that are outside the scope of VAT, and the rationale is that since no VAT is charged on these supplies, there is no VAT to reclaim.

This principle ensures that the VAT system remains neutral for businesses engaged primarily in both taxable and exempt activities. As a result, when a business makes exempt supplies, it is limited in its ability to recover VAT on inputs used directly for those activities.

Therefore, the logic behind option B is grounded in the nature of VAT: if no VAT is collected on the sales (in the case of exempt supplies), there cannot be a corresponding recovery of VAT on the expenditures made to facilitate those sales.