All alcoholic drinks are always standard rated. Alcohol-free beer and wines are similarly subject to VAT.
Category Archives: Latest VAT news
The penalty regime…the dark side of VAT
I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?
Overview
Broadly, a penalty is levied if the incorrect amount of VAT is declared, either by understating output tax due, or overclaiming input tax, or accepting an assessment which is known to be too low.
Amount of penalty
HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.
- An error, when reasonable care not taken: 30%;
- An error which is deliberate, but not concealed: 70%;
- An error, which is deliberate and concealed: 100%.
Reasonable care
There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.
HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore, a penalty may still be applicable.
Notification
Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.
A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.
What the penalty is based on
The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.
Defending a penalty
The percentage penalty may be reduced by a range of ‘defences:’
– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;
– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;
– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.
HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance and encourage businesses which genuinely seek to fulfil their obligations.
Appealing a penalty
HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.
The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.
These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.
Even darker
There are even more severe penalties for deliberate acts, including significant terms of imprisonment. That is the subject of another article.
Assistance
My advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties. It is always worth running a penalty past us.
New VAT Road Fuel Scale Charges from 1 May 2026
HMRC has published new VAT Road Fuel Scale Charges (RFSC) which apply from 1 May 2026 to 30 April 2027.
These provide details on the charges from 1 May 2026 to be used on a business’ VAT return and must be used from the start of the next prescribed accounting period beginning on or after 1 May 2026.
RFSC
A scale charge is a way of accounting for output tax on road fuel bought by a business for cars which is then put to private use. If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to identify specific business and private use. The charge is calculated on a flat rate basis according to the CO2 emissions of the car.
A business will need to calculate the correct RFSC based on a car’s CO2 emissions, and the length of its VAT accounting period. This will be either one, three, or twelve months. The CO2 emissions figure may be found here if the information is not available in the log book.
More on motoring expenses here.
HMRC Updates on VAT appeals
HMRC has updated its list of VAT appeals, which sets out the status of HMRC appeals and recent cases which they consider have potential implications for other taxpayers.
This is a list of VAT appeals that HMRC has lost, or partly lost, that could have implications for other businesses.
The list is updated regularly and details of finalised cases are retained for six months.
VAT and charities – updated guidance
HMRC has updated its guidance on How VAT affects charities. This includes details of a new relief from 1 April 2026 for VAT registered businesses donating goods to a charity (Section 5.5).
A VAT-registered business can zero-rate the donation of goods to a charity or its trading subsidiary provided that the goods are to be offered for sale.
From 1 April 2026, businesses do not have to account for VAT when they donate goods to a charity for:
- onward donation to an individual, another charity or another organisation
- use in the charity’s non-business activities
Goods may be donated without incurring a VAT charge when:
- the goods are eligible
-
A business donates goods for an eligible use
-
the goods are donated to a charity which is either registered with the Charity Commission, corresponding regulator (where required) or registered with HMRC for charity tax purposes
-
The donating business holds evidence that eligible goods have been donated to an eligible charity
Before 1 April 2026 businesses were required to account for VAT on a deemed supply when goods forming part of their assets were donated to a charity and input tax had originally been recovered on their purchase.
More on VAT and charities here.
VAT: Crowdfunding – What is taxable?
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet on specifically designed platforms and is an alternative to traditional ways of raising finance. The model is usually based on three parties: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organisation (the “platform”) that brings the parties together to launch the idea.
Crowdfunding is a major, growing source of funding for startups, charities, and creative projects, with the global market predicted to grow annually by around 15% from 2026 to 2033 with platforms like Kickstarter, Seedrs, Crowdcube, and GoFundMe being major players.
VAT Treatment
The VAT treatment of supplies that might potentially be made is no different to similar financing arrangements, for example; sponsorship, donations and investments made through more traditional routes. Whether a recipient of crowdfunding is liable to charge and pay VAT depends on the facts in each case.
Examples
Donations
- where nothing is given in return for the funding, it will be treated as a donation and not liable to VAT – the position is the same where all that the funder receives is a bare acknowledgement, such as a mention in a programme or something similar
Goods and/or services
- where the funder receives goods or services that have a real value associated with them, for example; clothing, tickets, DVDs, film viewings, output tax will be due
Combination
- where the payment is for a combination of the two examples above, if it is clear that the donation element is optional then that part of the sponsorship can be treated as a non-taxable donation and the supply will be taxable. If a donation element cannot be carved out, it is likely that all of the payment will be considered as VATable
Investment
- where the funding takes the form of an investment where the funder is entitled to a financial return such as; interest, dividends or profit share, any payment due to the funder is unlikely to be liable to output tax, The reason why most of these arrangements are outside the scope of VAT is that the provision of capital in a business venture is not seen as a supply for VAT purposes
Royalties
- if the arrangement is that the funder receives royalties based on a supply of intellectual property or some other similar benefit the payment is likely to be consideration for a taxable supply and output tax will be due
Loan-based
- Individuals lend money to businesses or people for interest payments. The making of any advance or the granting of any credit is exempt.
VAT registration
If income from the sources above which are deemed to be subject to VAT exceeds the VAT registration limit (currently £90,000 in any twelve-month period) the person, in whichever legal identity, such as; individual, company, partnership, Trust etc will be liable to register for VAT. If income is below this limit, it will be possible, but not mandatory to VAT register. The benefits of voluntary registration here.
Input tax recovery
If VAT registered, any input tax incurred on costs relating to crowdfunding is usually recoverable (see here for exceptions). However, if the costs relate to donations or some types of investment then input tax claims are specifically blocked as they would relate to non-business activities. If exempt supplies are made, attributable input tax is generally blocked unless it is de minimis.
Commentary
There can be difficulties in establishing the tax liability of crowdfunding and in a broader sense “sponsorship” in general. However, experience insists that the biggest issue is initially identifying that there may be a VAT issue at all. If you, or your clients are involved in crowdfunding, or have sponsors, it would be prudent to review the VAT treatment of the activities.
A VAT did you know?
Around 50% of businesses do not recover VAT incurred overseas and there is an estimated $5 billion not reclaimed each year.
VAT: Recovery of input tax on fuel costs
Road Fuel Scale Charge (RFSC) simplification.
It is common for a staff member to use a car for both business and private purposes (a staff member also covers sole proprietors and partners). Input tax is only recoverable in respect of the business use, so an apportionment is required. This may be done in the following ways.
- Apply the RFSC. This is a set figure per month which represents a disallowance for private use and is repaid to HMRC
- Keep detailed mileage records and only claim for the business element
- If a business pays a mileage allowance for exact business miles travelled it may reclaim input tax on that actual payment. HMRC publish approved Advisory Fuel Rates, which are used to calculate the payments and the recoverable VAT
- Do not make a claim at all (if business mileage is minimal or the administration outweighs the cost benefit)
Application
One RFSC must be applied for each car that is used both privately and for business. The fuel scale charges are calculated according to a car’s CO2 emissions and the fixed charge is added to the output figure on the VAT return.
A business will need to check the relevant car’s CO2 emissions figure. This is available for the car’s log book. For dual fuel cars, the lower of the two figures is used.
The calculation
The RFSC allows a business to account for the VAT on fuel in monthly, quarterly or annual returns. When calculating VAT on fuel, if the relevant car has a CO2 emission of 160g, and the business files quarterly returns, the VAT inclusive consideration for a three-month period is £363.00.
The RFSC for the private use of the vehicle will then be calculated as follows: £363.00 x 1/6 (the VAT fraction of the total figure) = £60.50
In this example, the VAT output tax due to HMRC is £60.50 and this is included in Box 1 of the VAT return.
This amount will compensate for any private use of fuel where VAT has already been claimed on the initial purchase of the fuel.
Notes
If a business uses the Flat Rate Scheme no VAT is reclaimable on fuel and no scale charge is applicable.
The RFSC does not apply to commercial vehicles (vans, lorries etc) however, if there is a significant level of private mileage, VAT claims should be adjusted to exclude input tax on this.
HMRC publish updated RFSC valuation tables annually. The latest table is here
Input tax claims may be restricted due to partial exemption or non-business activities.
Help
HMRC have also published a useful ready reckoner tool which assists with the process here
Mileage payments
If a business recovers input VAT based on mileage payments made to employees, it must ensure that employees submit fuel VAT receipts evidencing that they have incurred costs and VAT on fuel. Without such receipts, HMRC may deny the VAT recovery on mileage reimbursements. Clearly, the total VAT incurred on fuel must exceed the business element claimed.
EVs
Details on charging electric vehicles here and here
More on motoring costs in general here.
VAT: HMRC clarifies the Domestic Reverse Charge does not apply to EV charging
HMRC has updated its Notice 735 which explains why the Domestic Reverse Charge (DRC) does not apply to electric vehicles (EVs).
The legislation for the DRC for electricity was designed to exclude supplies of electricity made under supply licences (supply electricity). It also excludes resale supplies of electricity made between the person holding the supply licence and the person making the supply to the consumer of the electricity (the vehicle user).
This means that the reverse charge does not apply to the supply of electricity at a charging point for EVs. This is because either the vehicle user is not VAT registered, or because it is not a wholesale supply. This applies whether or not the electricity is supplied at a public charging point.
Wholesale has an ordinary meaning where the supply is business to business and there is little or no consumption of the supply. EV charging does not fall within this definition.
For the latest case law on public EV charging see here.
VAT: New, important HMRC guidance for zero-rating exports
HMRC has updated its Notice 703 which explains the conditions for VAT zero-rating exports of goods. It is crucial for a business to have the correct documentation to evidence goods physically moving out of the UK.
Information on official evidence has been updated in paragraphs 6.2, 7.1 and 7.2 as follows:
- Para 6.2 Official evidence
Official evidence is an export declaration for the goods submitted to the Customs Declaration Service which has generated a departure confirmation. You will need the Movement Reference Number (MRN) or Declaration Unique Consignment Reference (DUCR) of the declaration.
- Para 7.1 Air and sea freight
- If you are using commercial transport documents as proof of export for goods exported outside the UK or EU by:
- air — you must obtain and retain an authenticated basic master airway bill or house air waybill endorsed with the flight prefix and number, and the date and place of departure
- sea — you must keep one of the copies of the bill of lading or sea waybill along with a note of the export declaration Movement Reference Number (MRN) or Declaration Unique Consignment Reference (DUCR) or, where a shipping company does not issue these, a certificate of shipment (certifying actual shipment) along with a note of the export MRN or DUCR, given by a responsible official of that company.
-
7.2 Road freight
The international consignment note provides evidence of the identity of the contracting parties when goods are transferred by road. It is in 3 parts and is completed and signed by the sender of the goods, the carrier and the person receiving the goods. If the international consignment note is used as part of the evidence, it is important that the information is complete and all the details legible. Where the overseas customer arranges for the goods to be collected ex-works the international consignment note alone is not conclusive evidence that the goods in question have left the UK. Read paragraph 6.6 for additional evidence required when making an indirect export.
Where goods leave through a port using the Goods Vehicle Movement Service, you should retain the Goods Movement Reference of the vehicle for that journey.
Failure to produce the appropriate and accurate evidence will result in output tax being due on the relevant goods.