How Do I Handle VAT If I Sell Both Taxable and Exempt Goods or Services?

A mixed supply business is one that makes both taxable supplies and exempt supplies. Taxable supplies include anything charged at the standard rate of 10%, the reduced rate of 5%, or the zero rate of 0%. Exempt supplies are those that fall outside the VAT system entirely — no VAT is charged, and no input VAT can be recovered on costs related to them.

Common examples of mixed supply businesses in The Bahamas include real estate companies that earn both commercial rent (taxable at 10%) and residential rent over 45 days (exempt). Financial institutions may offer some services that are taxable and others that are exempt. A medical practice might sell taxable medical supplies alongside providing exempt healthcare services.

The challenge arises with input VAT — the VAT you pay on your own business purchases. If every purchase clearly relates to either your taxable or your exempt activity, it is simple: claim input VAT on the taxable side, do not claim on the exempt side. But in practice, many costs support both sides of the business. Rent for your office, utilities, accounting fees, marketing costs, and general supplies all serve the entire business, not just one activity. For these shared costs, you must use the apportionment method to determine how much input VAT you can recover.

The distinction between zero-rated and exempt is the most consequential classification decision here. Both carry a 0% VAT rate, but zero-rated supplies allow full input VAT recovery, while exempt supplies block it. For a detailed comparison, see

.

The standard method for apportioning input VAT in a mixed supply business is the turnover-based formula. This calculates the proportion of your total supplies that are taxable and applies that percentage to your shared input VAT costs.

The formula is: Recoverable input VAT on shared costs = Total input VAT on shared costs multiplied by (Total taxable supplies divided by Total supplies). Total taxable supplies include standard-rated, reduced-rated, and zero-rated supplies. Total supplies include everything: standard-rated, reduced-rated, zero-rated, and exempt.

For example, suppose your business has total supplies of BSD $500,000 in a filing period. Of that, BSD $350,000 is from taxable supplies (standard-rated and zero-rated combined) and BSD $150,000 is from exempt supplies. Your taxable proportion is BSD $350,000 divided by BSD $500,000 = 70%. If you have BSD $4,000 in input VAT on shared costs (rent, utilities, general admin), you can claim 70% of that, which is BSD $2,800. The remaining BSD $1,200 is a non-recoverable cost to your business.

This formula is applied to shared costs only. Input VAT on costs that are directly and exclusively attributable to taxable supplies is fully recoverable. Input VAT on costs that are directly and exclusively attributable to exempt supplies is not recoverable at all. The apportionment formula only comes into play for costs that cannot be directly attributed to either category.

Your taxable proportion may change from period to period as your sales mix shifts. In one month, taxable supplies might represent 70% of your total; in the next, it might be 65%. The question is whether you must recalculate the proportion every filing period or whether you can use an annual average.

The standard approach is to calculate the proportion based on the current filing period's actual figures. This means each VAT return reflects the actual split between taxable and exempt supplies for that specific period. While this requires more frequent calculation, it produces the most accurate result.

Some businesses may be permitted to use a provisional annual rate and then make an annual adjustment at the end of their fiscal year. Under this approach, you use an estimated taxable proportion throughout the year and then reconcile against actual figures in the final period. If you over-claimed during the year, you reduce your input VAT claim in the final return. If you under-claimed, you increase it.

Which approach applies to your business may depend on guidance from the Department of Inland Revenue or the specific circumstances of your operations. If your supply mix is relatively stable from period to period, an annual adjustment approach may be more practical. If it fluctuates significantly, period-by-period calculation is safer.

Regardless of which method you use, the critical point is consistency. Choose a method, apply it correctly, and be prepared to justify your approach if the Department of Inland Revenue reviews your returns.

Mixed supply businesses face higher record-keeping demands than businesses that make only taxable supplies. The Department of Inland Revenue expects you to maintain records that clearly demonstrate how you attributed costs and calculated your input VAT apportionment.

At a minimum, you need to maintain separate tracking of your sales by VAT category for each filing period. This means recording total standard-rated sales, total reduced-rated sales, total zero-rated sales, and total exempt sales. These figures feed directly into both your OTAS return and your apportionment calculation.

For input VAT, you need to categorise each purchase into one of three buckets: directly attributable to taxable supplies, directly attributable to exempt supplies, or shared. The shared bucket is where the apportionment formula applies. Keeping a clear record of how you categorised each cost protects you in an audit.

Retain all invoices, receipts, and supporting documents for a minimum of five years. The Department of Inland Revenue can audit any period within this window, and you need to be able to produce the evidence behind every number on your return.

For businesses with complex operations, it is worth maintaining a written policy document that explains your apportionment methodology. This document should describe how you determine whether a cost is directly attributable or shared, the formula you use for apportionment, and any assumptions you make. If an auditor reviews your records, having a clear methodology on file demonstrates that you are taking a considered and consistent approach. For more on general record-keeping obligations, see

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Several errors commonly affect mixed supply businesses in The Bahamas. Being aware of them can help you avoid penalties and overpayments.

The most frequent mistake is failing to apportion at all. Some businesses claim full input VAT on all purchases, even though a portion of their supplies are exempt. This leads to over-claiming, which the Department of Inland Revenue will identify and penalise during an audit. Late filing attracts a BSD $100 fixed penalty, and underpaid VAT results in 10% of the unpaid amount plus 1.5% monthly interest.

Conversely, some businesses are overly conservative and do not claim any input VAT on shared costs because they find the apportionment process confusing. This is unnecessarily costly. You are entitled to recover the taxable proportion, and failing to claim it means you are effectively paying more tax than required.

Another common error is misclassifying exempt supplies as zero-rated. Both have a 0% rate, but the input VAT treatment is completely different. Zero-rated supplies allow full input VAT recovery; exempt supplies do not. If you classify residential rental income as zero-rated instead of exempt, you will over-claim input VAT and face penalties when audited.

Failing to update the apportionment ratio when the business mix changes is another pitfall. If you opened a new exempt service line last year, your taxable proportion has likely decreased. Using last year's ratio without adjustment means you are over-claiming on shared costs.

Finally, poor record-keeping makes it impossible to defend your apportionment in an audit. Without clear documentation of how you categorised costs and calculated the ratio, the Department of Inland Revenue may disallow your input VAT claims entirely and apply their own calculation, which may be less favourable.

Several additional factors can affect your input VAT recovery if you operate a mixed supply business in The Bahamas.

Capital purchases present a particular challenge. If you buy a vehicle, equipment, or property that will be used for both taxable and exempt activities, you must apportion the input VAT at the time of purchase. For significant capital items, consider whether a more specific attribution method is justified. For example, if a vehicle will be used 80% for taxable deliveries and 20% for exempt-related travel, you could argue for an 80% input VAT claim rather than using the general turnover-based ratio.

The July 2025 construction restrictions add another layer. VAT credits can no longer be claimed on goods and services for major construction activity unless the registrant is a real estate developer. If your mixed supply business is undertaking construction and you are not classified as a real estate developer, the input VAT on construction costs is blocked entirely, regardless of your taxable proportion.

Changes in use can also affect your position. If an asset that was initially used for taxable supplies is later repurposed for exempt use, you may need to make an adjustment to your previously claimed input VAT. The reverse also applies — if an asset moves from exempt to taxable use, you may be able to recover additional input VAT.

For businesses operating near the BSD $100,000 VAT registration threshold, remember that both taxable and exempt supplies count toward the threshold calculation. If your combined turnover from all activities exceeds BSD $100,000, you must register within 14 days, even if a significant portion of your supplies are exempt. See

for registration requirements.

If you are also considering whether your excess input VAT credits qualify for a cash refund, be aware that as of July 2025, refunds are restricted to businesses with at least 50% zero-rated or reduced-rated supplies. If your mixed supply business generates excess credits primarily because of exempt supplies (which block input VAT recovery), you will not qualify. See

for full details on the refund restrictions.