What does 'input VAT limits' refer to?

Input VAT limits refer to restrictions on the amount of input VAT that businesses can reclaim in relation to exempt supplies. In the context of VAT, businesses can typically reclaim the VAT they’ve paid on purchases related to their taxable sales. However, when a business makes exempt supplies—sales on which no VAT is charged—they are generally not allowed to reclaim the input VAT related to those exempt supplies. This creates a limitation on their ability to recover VAT, effectively creating a system of input VAT limits for those specific circumstances.

Understanding this concept is key for businesses that deal with both taxable and exempt supplies, as it directly affects their VAT accounting and cash flow. It also highlights the importance of distinguishing between different types of supplies in VAT calculations and the implications this differentiation has on reclaiming VAT.