Category Archives: VAT Partial Exemption

VAT – Care with input tax claims

By   20 January 2026
0
Claim checklist

You have a purchase invoice showing VAT.  You are VAT registered, and you will use the goods or services purchased for your business… can you claim it?

Assuming a business is not partly exempt or not subject to a restriction of recovery of input tax due to non-business activities (and the claim is not for a motor car or business entertainment) the answer is usually yes.

However, HMRC is now, more than ever before, concerned with irregular, dishonest and inaccurate claims.  It is an unfortunate fact that some people see making fraudulent claims as an “easy” way to illegally obtain money and, as is often the case, honest taxpayers are affected as a result of the (understandable) concerns of the authorities.  Missing Trader Intra-Community (MTIC) or “carousel” fraud has received a lot of publicity over recent years with an estimate of £Billions of Treasury money being obtained by fraudsters.  While this has been generally addressed, HMRC consider that there is still significant leakage of VAT as a consequence of dishonest claims. HMRC’s interest also extends to “innocent errors” which result in input tax being overclaimed.

In order to avoid unwanted attention from HMRC, what should a business be watching for when claiming credit for input tax?  Broadly, I would counsel making “reasonable enquiries”.  This means making basic checks in order to demonstrate to HMRC that a business has taken care to ensure that a claim is appropriate.  This is more important in some transactions than others and most regular and straightforward transactions will not be in issue.  Here are some pointers that I feel are important to a business:

Was there a supply?

This seems an obvious question, but even if a business holds apparently authentic documentation; if no supply was made, no claim is possible.  Perhaps different parts of a business deal with checking the receipt of goods or services and processing documents.  Perhaps a business has been the subject of fraud by a supplier.  Perhaps the supply was to an individual rather than to the business.  Perhaps a transaction was aborted after the documentation was issued.  There may be many reasons for a supply not being made, especially when a third party is involved.  For example, Co A contracts with Co B to supply goods directly to Co C. Invoices are issued by Co B to Co A and by Co A to Co C.  It may not be clear to Co A whether the goods have been delivered, or it may be difficult to check.  A lot of fraud depends on “correct” paperwork existing without any goods or services changing hands.

Is the documentation correct?

The VAT regulations set out a long list of details that a VAT invoice must show.  Full details on invoicing here  If any one of these required items is missing HMRC will disallow a claim.  Beware of “suspicious” looking documents including manually amended invoices, unconvincing quality, unexpected names or addresses of a supplier, lack of narrative, “copied” logos or “clip-art” additions etc.  One of the details required is obviously the VAT number of the supplier.  VAT numbers can be checked for validity here

Additionally, imports of goods require different documentation to support a claim and this is a more complex procedure (which extends to checking whether supplies of goods have been made and physical access to them).  A lot of fraud includes a cross border element so extra care should be taken in checking the validity of both the import and the documentation.

Ultimately, it is easy to create a convincing invoice and HMRC is aware of this.

Timing

It is important to claim input tax in the correct period.  Even if a claim is a day out it may be disallowed and penalties levied. details of time of supply here

Is there VAT on a supply?

If a supplier charges VAT when they shouldn’t, eg; if a supply is zero rated or exempt or subject to the Transfer of A Going Concern rules (TOGC), it is not possible to reclaim this VAT even if the recipient holds an apparently “valid” invoice.  HMRC will disallow such a claim and will look to levy penalties and interest.  When in doubt; challenge the supplier’s treatment.

Place of supply

Only UK VAT may be claimed on a UK return, so it is important to check whether UK VAT is actually applicable to a supply.  The place of supply (POS) rules are notoriously complex, especially for services, if UK VAT is shown on an invoice incorrectly, and is claimed by the recipient, HMRC will disallow the claim and look to levy a penalty, so enquiries should be made if there is any uncertainty.  VAT incurred overseas can, in most cases be recovered, but this is via a different mechanism to a UK VAT return. Details on claiming VAT in other EC Member States here. (As with many things, this may change after Brexit).

One-off, unusual or new transactions

This is the time when most care should be taken, especially if the transaction is of high value.  Perhaps it is a new supplier, or perhaps it is a property transaction – if a purchase is out of the ordinary for a business it creates additional exposure to mis-claiming VAT.

To whom is the supply made?

It is only the recipient of goods or services who may make a claim; regardless of; who pays or who invoices are issued to.  Care is required with groups of companies and multiple VAT registrations eg; an individual may be registered as a sole proprietor as well as a part of a partnership or director of a limited company, As an illustration, a common error is in a situation where a report is provided to a bank (for example for financing requirements) and the business pays the reporting third party.  Although it may be argued that the business pays for the report, and obtains a business benefit from it, the supply is to the bank in contractual terms and the business cannot recover the VAT on the services, in fact, in these circumstances, nobody is able to recover the VAT. Other areas of uncertainty are; restructuring, refinancing or acquisitions, especially where significant professional costs are involved.

e-invoicing

There are additional rules for electronically issued invoices. Details here

A business may issue invoices electronically where the authenticity of the origin, integrity of invoice data, and legibility of invoice content can all be ensured, and the customer agrees to receive invoices electronically.

  • ‘Authenticity of the origin’ means the assurance of the identity of the supplier or issuer of the invoice
  • ‘Integrity of content’ means that the invoice content has not been altered
  • ‘Legibility’ of an invoice means that the invoice can be easily read.

A business is free to choose a method of ensuring authenticity, integrity, and legibility which suits its method of operation. e-invoicing provides additional opportunities for fraudsters, so a business needs to ensure that its processes are bulletproof.

HMRC’s approach 

If a claim is significant, or unusual for the business’ trading pattern, it is likely that HMRC will carry out a “pre-credibility” inspection where they check to see if the claim is valid before they release the money.  Another regular check is for HMRC to establish whether the supplier has declared the relevant output tax on the other side of the transaction (a so-called “reference”). Not unsurprisingly, they are not keen on making a repayment if, for whatever reason, the supplier has not paid over the output tax.

What should a business do?

In summary, it is prudent for a business to “protect itself” and raise queries if there is any doubt at all over making a claim. It also needs a robust procedure for processing invoices.  If enquiries have been made, ensure that these are properly documented for inspection by HMRC as this is evidence which may be used to mitigate any potential penalties, even if a claim is an honest mistake. A review of procedures often flushes out errors and can lead to increased claims being made.

As always, we are happy to assist.

VAT: Partial exemption – HMRC guidance updated

By   13 January 2026
0

HMRC Publications

HMRC has updated its Notice 706 on partial exemption. This guidance explains partial exemption and the methods and calculations a business may use to calculate the amount of input tax it can recover. 

More detailed guidance has been added to Paragraph 10.2 on a company’s sale of existing shares.

VAT: Partial exemption input tax attribution. The Littlewoods case

By   13 January 2026
0
Latest from the courts
 
In the Littlewoods Limited First-tier Tribunal (FTT) case the issue was the ability to recover input tax incurred on photography costs.
Background
Littlewoods used photographers for the creation of product specific photographs for use in catalogues and in connection with its online retail store. It made claims to recover this input tax, but HMRC refused a full refund. This appeal was against that decision.
The appellant is partly exempt. It makes taxable sales of goods and also makes exempt supplies of finance and insurance. This means that it is unable to recover all input tax it incurs.
Contentions
 
The appellant argued that the photography costs were directly attributable to the sale of the products photographed and was consequently fully recoverable.
HMRC contended that not all of the VAT was claimable because an element was referable to the exempt supplies (ie: the input tax was incurred to support both the online taxable sale of goods and of exempt finance). Therefore, an apportionment was required.
Decision
 
The appeal was allowed.
 
The Tribunal considered that each use made of the photographs to be exclusively in the making of taxable supplies of retail goods. Any link to credit or insurance was, in its view, at the most, indirect but, given the nature of the costs, probably non-existent. Consequently, the photography did not promote any finance or insurance products so that no restriction of the input tax claims was required.
Commentary
Yet another case on input tax attribution. As someone once said; partial exemption is more of an art than a science…
The judge distinguished this appeal from the N Brown case as the circumstances were different and that the court applied the wrong legal test in terms of the micro/macro level of business per the Royal Opera House case.

VAT treatment of the supply of locum doctors

By   16 December 2025
0

HMRC has issued Revenue and Customs brief 9 (2025)  which covers the VAT liability of the supply of temporary medical staff (locum doctors).

This change to HMRC’s previous view (that these supplies were taxable) is a consequence of the First-Tier Tribunal’s decision in Isle of Wight NHS Trust case which ruled in favour of the Trust, finding that the supply of locums is an exempt service. 

The Brief also provides guidance for businesses who wish to claim a refund of overdeclared output tax following the decision.

The ABC of VAT – property

By   15 December 2025
0
A glossary

Anyone who has had even the slightest brush with VAT will know that it is a very complex tax. Now, multiply that complexity by the intricacy and occasionally arcane nature of property law and one may see that the outcome will be less than straightforward. I have produced a general guide and an article on residential property VAT Triggerpoints

I hope the following glossary will help with steering through some of the difficulties.

  • Annex– a building which is joined to or is next to a larger main building usually an extension or addition to a building
  • Assign – to transfer the right or interest in a property from one party to another
  • Break clause – a clause allowing either landlord or tenant to give written notice after a particular date or period of the tenancy in order to end the tenancy
  • Beneficial owner – party deemed to make a supply of property rather than the legal owner
  • Blocked input tax – VAT which a developer is unable to recover when constructing a new dwelling. Typically, expenditure on good such as; carpets, fitted furniture, and gas and electrical appliances
  • Building materials– goods ordinarily incorporated into a property which attracts similar VAT treatment to the construction services.
  • Capital Goods Scheme(CGS) – a method of calculating the recovery amount of input tax incurred on property over a ten-year period, Details of the CGS here
  • Certificate – a document issued to a supplier in order to obtain certain zero-rated or reduced-rated building work
  • Change of number of dwellings– usually a conversion from commercial to residential, or a single house into flats (or flats into a single house) at 5% VAT
  • Consideration– a thing done or given in exchange for something else = a supply. Usually quantified in money, but in some cases non-monetary consideration
  • Construction of new dwellings – a zero rated supply
  • Contract – legal document detailing the agreement of terms between the vendor and buyer
  • Contractor – entity responsible for building works
  • Conversion–work on a non-residential building which results in a property designed as a dwelling(s) being created
  • Covenants – rules governing the property in its title deeds or lease. May impact the definition of dwellings
  • Curtilage– either a garden, or an area surrounding a building which is deemed to be part of the property
  • Designed as a dwelling– a property initially designed for residential use, regardless of any subsequent alternative use
  • Dilapidations – items that have been damaged during a tenancy for which the tenant is responsible for the cost of repair or replacement. Usually VAT free
  • DIY Housebuilders’ Scheme – a scheme which ‘self-builders’ to recover VAT on a new build dwelling or conversion. Details here
  • Domestic Reverse Charge – a self-supply charge details here
  • Dwelling– a building deemed to be residential
  • Empty house – if, in the ten years before work on a dwelling starts, it has not been lived in, the work may be subject to 5% rather than 20% VAT
  • Exempt– a supply that is VAT free. It usually results in attributable input tax falling to be irrecoverable
  • Facade– a wall (or two walls on a corner plot) which may be retained without affecting the zero rating of a new dwelling construction
  • Grant– a supply of an interest in land
  • Holiday home – the sale or long lease of a holiday home cannot be zero-rated even if it is designed as a dwelling
  • Housing Association – a non-profit organisation which rents residential property to people on low incomes or with particular needs
  • In the course of construction– meaningful works that have occurred in relation to the construction of a building (but prior to its completion)
  • Incorporated goods – goods sold with a new dwelling which are zero rated and to which the input tax block does not apply. See white goods
  • Input tax– VAT incurred on expenditure associated with property
  • Interest in, or right over, land– the right to access to and use of, land. Usually via ownership or lease
  • Lease – legal document governing the occupation by the tenant of a premises for a specific length of time
  • Licence to occupy– a permission to use land that does not amount to a tenancy
  • Live-work units – a property that combines a dwelling and commercial or industrial working space. Usually subject to apportionment
  • Major interest–a supply of a freehold interest or a lease exceeding 21 years
  • Multiple occupancy dwelling – a dwelling which is designed for occupation by persons not forming a single household
  • New building–a commercial building less than three years old the sale of which is mandatorily standard
  • Non-residential– a commercial building which is not used as a dwelling
  • Open market value – likely sale price with a willing seller and buyer, with a reasonable period of marketing and no special factors affecting the property
  • Option to tax (OTT) – act of changing the exempt sale or letting of a commercial into a taxable supply. The purpose is to either; recover input tax or avoid input tax being charged. Details here
  • OTT disapplication– the legal removal of a vendor’s option to tax
  • OTT not applicable – the OTT does not apply to residential buildings (so VAT can never apply to dwellings)
  • OTT revocation– the ability to revoke an option to tax after six months or twenty years
  • Partial exemption– a calculation to attribute input tax to exempt and taxable. Generally, VAT incurred in respect of exempt supplies is irrecoverable
  • Person constructing – a developer, contractor or sub-contractor who constructs a building
  • Premium – upfront payment for a supply of property
  • Relevant Charitable Purpose (RCP)–the use by a charity for non-business purposes or for use as a village hall or similar
  • Relevant Residential Purpose (RRP)– dwelling used for certain defined residential purposes, eg; children’s home, a hospice or student accommodation
  • Reverse surrender– a tenant surrenders an onerous lease to the landlord and makes a payment to surrender
  • Share of freehold – where the freehold of the property is owned by a company and the shareholders are the owners of the property
  • Single household dwelling– a building designed for occupation by a single household
  • Snagging – the correction of building faults. Usually follows the VAT liability of the original work
  • Stamp Duty Land Tax (SDLT) – tax paid by a purchaser of a property. SDLT is increased if the sale of a commercial property is the subject of an option to tax
  • Substantial reconstruction– certain significant works to a listed building
  • Surrender– a tenant surrenders the lease to the landlord in return for payment
  • Taxable supply– a supply subject to VAT at the standard, reduced or zero-rate
  • Use as a dwelling – a building which was designed or adapted for use as someone’s home and is so used
  • Vendor – entity selling a property
  • Transfer of a Going Concern (TOGC) – the VAT free sale of the assets of a business as a going concern. This may include a tenanted property
  • Zero-rated– a taxable supply subject to VAT at a rate of 0%

We strongly recommend that advice is obtained if any property transaction is being undertaken.

Details of our land and property services may be found here.

Charities and VAT – A Guide

By   18 November 2025
0

Surely charities don’t have to pay taxes?

This is a common myth, and while charities and Not-For-Profit entities (NFPs) do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities.  Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted.  The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc.  Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants.  It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

  • ensure any applicable reliefs are taken advantage of
  • if significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss
  • review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place
  • review any land and property transactions. These are high value and some reliefs are available. Additionally it is usually possible to carry out planning to improve the VAT position of a property owning charity
  • review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing
  • consider a VAT “healthcheck” which often identifies problems and planning opportunities

We have considerable expertise in the NFP sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP or its trading subsidiary) which makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration.  If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals.  An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax.  For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes.  However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred.  A business in this position is called partly exempt.  Generally, any input tax which directly relates to exempt supplies is irrecoverable.  In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business.  The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered.  Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. There is also a de minimis relief.

My flowchart may be of use: partial exemption flowchart 

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

Common VAT mistakes

By   2 October 2025
0

VAT basics

None of us are perfect, and any business can make mistakes with VAT despite all intentions to take reasonable care. So what are the most common errors? Here’s a list of pitfalls to avoid:

Wrong rate of output tax charged

Land and property transactions

  • Misunderstanding the correct VAT treatment of a land and property transactions
  • Not recognising VAT issues
  • Issues with the Option To Tax
  • TOGC issues
  • A guide to triggerpoints here

Cross-border issues

  • Failing to meet the requirements to zero-rate exports
  • Incorrect import procedures
  • Ignoring the reverse charge

Inter-company charges

Partial exemption

Business entertainment

  • Different rules apply to the recovery of input tax on entertaining depending on the type of recipient, eg: clients, contacts, staff, partners and directors depending on the circumstances

Registration

VAT groups

  • Failing to VAT group when beneficial or failing to disband
  • Recovery of input tax
  • Timing of transactions
  • Partial exemption issues

Tax points (Time Of Supply)

  • Failing to recognise a tax point for output tax
  • Incorrect treatment of deposits
  • Incorrect treatment of forfeit deposits
  • Recovery of input tax at incorrect time

Bad Debt Relief issues

  • Failing to claim Bad Debt Relief
  • Failing to repay a claim to HMRC when payment from customer is received
  • Failing to repay input tax when a supplier is not paid (after six months)

Overseas issues

Claiming input tax without the correct documentation

  • A guide to alternative evidence here

Recovering irreclaimable input tax

  • A guide to what VAT is not claimable here

Return errors

  • A box-by-box guide here

Business promotion schemes

Composite or separate supplies

Changes to a business

  • Selling new products, acquisitions, share sales, disposals, re-structuring, and ceasing to trade can all have a VAT impact and this can be missed

Fuel and motoring costs

Special schemes

One-off transactions

  • Failing to recognise VAT issues of unusual or one-off transactions

Non-business (NB) and charitable activities

  • Failure to recognise NB activities
  • Failure to restrict input tax in connection with NB activities

Errors can lead to draconian penalties, and ignorance is not a defence.

A guide to VAT triggerpoints here .

VAT – A beginner’s practical guide

By   22 September 2025
0

VAT Basics

I am often asked if there is a VAT beginner’s guide, I find HMRC guidance generally unhelpful for someone without a tax background, so, here is all the basic information you may need in one place.

What is VAT?

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK. It is charged on goods and services and is an ad valorem tax, which means it is proportionate to the value of the supply made.

All goods and services that are VAT rated (at any rate including zero) are called “taxable supplies”. VAT must be charged on taxable supplies from the date a business first needs to be registered. The value of these supplies is called the “taxable turnover”.

Exempt items

VAT does not apply to certain services because the law says these are exempt from VAT. These include some; financial services, property transactions, insurance education and healthcare. Supplies that are exempt from VAT do not form part of the taxable turnover.

The VAT rates

There are currently three rates of VAT in the UK:

  • 20% (standard rate) – Most items are standard rate unless they are specifically included in the lower rate categories.
  • 5% (reduced rate) – this applies to applies to certain items such as domestic fuel and power, installation of energy-saving materials, sanitary hygiene products and children’s car seats.
  • 0% (zero rate) – applies to specified items such as food, books and newspapers, children’s clothing, exports, new houses and public transport.

VAT registration

A business is required to register for, and charge VAT, if:

  • the taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
  • a VAT registered business has been acquired as a going concern (TOGC)
  • potentially; goods or services have been purchased VAT free from non-UK countries (a self-supply)

Registration limit

The current VAT registration threshold is £90,000. If at the end of any month the value of taxable supplies made in the past twelve months is more than this figure a business MUST VAT register.  A business can opt to register for VAT if its taxable turnover is less than this. Please note that taxable turnover is the amount of income received by a business and not just profit. If a business does not register at the correct time it will be fined.

Future test

Additionally, if, at any time there are reasonable grounds to expect that the value of the taxable supplies will be more than the threshold in the next thirty days alone a business must register immediately.

What are the exceptions?

VAT is not chargeable on:

  • taxable supplies made by a business which is not, and is not required to be, registered for VAT
  • zero rated supplies
  • supplies deemed to be made outside the UK
  • exempt supplies

What if a business only makes exempt or zero-rated supplies?

Exempt

If a business only makes exempt supplies, it cannot be registered for VAT. If a business is registered for VAT and makes some exempt supplies, it may not be able to reclaim all of its input tax.

Zero-rated

If a business only supplies goods or services which are zero-rated, it does not have to register for VAT, but, it may do so if it chooses – this is usually beneficial.

What is input tax and output tax?

Input tax is the VAT a business pays to its suppliers for goods and services. It is VAT on goods or services coming into a business. In most cases, input tax is the VAT that registered businesses can reclaim (offset against output tax).

Output tax is the term used to describe the VAT charged on a business’ sales of goods or services. Output tax is the VAT a business collects from its customers on each sale it makes.

A full guide to VAT jargon here

Is there anything that will make VAT simpler for a small business?

There are a number of simplified arrangements to make VAT accounting easier for small businesses. These are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers
  • Tour Operators’ Margin Scheme
  • Bad Debt Relief

Details may be found here and here and here.

VAT calculation

  • A business adds VAT to the value of sales it makes to other businesses or customers
  • The VAT amount is reached by multiplying the sale amount by the VAT rate percentage, then adding that to the value of the sale.
  • The total of the VAT on sales for a VAT period is output tax
  • For a VAT period, a business will total all VAT it has been charged by suppliers (eg; stock, repairs, rent, and general business expenses etc) – this is input tax.
  • On the VAT return for the period, the amount payable or reclaimable to HMRC is the output tax less input tax.

Records

A business must keep complete, up-to-date records that enable it to calculate the correct amount of VAT to declare on its returns. VAT records must be kept for at least six years, because a business will need to show them to HMRC when asked.

It is acceptable for ordinary business records to be the basis for VAT accounts. A business will need records of sales and purchases (and any adjustments such as credit notes) including details of how much VAT the business charged or paid. If trading internationally, records of imports and exports/dispatches and acquisitions with all overseas territories, including the EU must be recorded. VAT records must show details of any supplies a business has given away or taken for personal use.

VAT records must also include all invoices you have received and issued. Invoice requirements here

Records will also need to include a VAT account, showing how total input tax and output tax has been calculated to include in your VAT returns.

It is vital to ensure that the VAT records are accurate. Failure to do so can lead to significant tax penalties

MTD

For certain business, the new MTD rules apply and certain software must be used. Details here

Time of supply (tax point)

It is important to establish the time VAT is due. Full details here

VAT returns

A VAT registered business must submit returns on a regular basis (usually quarterly or monthly). A VAT return summarises a business’ sales and purchases and the VAT relating to them. All the information a business requires must be in its VAT records, specifically a VAT account.

Return requirements include:

  • sales total (excluding VAT)
  • output tax – this also includes VAT due on any other taxable transactions, eg; barters, non-monetary consideration, goods taken for personal use
  • value of purchases (excluding VAT)
  • input tax claimable
  • total of VAT payable/claimable

A box by box guide to returns here. 

Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later.

VAT Land & Property: Who opts to tax? – Authorised signatories

By   8 September 2025
0
Who opts to tax?

HMRC has published Public Notice 742A . Changes were made in connection to authorised signatories, in particular; corporate bodies, overseas entities and powers of attorney. It is important to establish who can sign an option to tax (OTT) form VAT1614A as getting it wrong may invalidate an OTT with potentially very expensive consequences.

A guide to the OTT here.

It seems an appropriate time to look at who can sign an OTT form. HMRC guidance states:

“The person responsible for making the decision and notifying the option to tax depends on the type of legal entity holding (or intending to hold) the interest in the land or building, and who within that entity has the authority to make decisions concerning VAT. In most cases it will be the sole proprietor, one or more partners (or trustees), a director or an authorised administrator. If you have appointed a third party to notify an option to tax on your behalf, HMRC requires written confirmation that the third party is authorised to do so.”

Some specific situations:

Beneficial owners

In cases where there is both a beneficial owner and a legal owner of land or buildings for VAT purposes it is the beneficial owner who is making the supply of the land or building. It is therefore the beneficial owner who should OTT. This may not be the case where the beneficiaries are numerous, such as unit trusts and pension funds. In these cases, the person deemed to be making the supply is the trustee who holds the legal interest and receives the immediate benefit of the consideration.

Joint owners

Joint ownership is where two entities purchase land or buildings together, or one party sells a share in property to another party. Usually, a supply may only be made by both entities together. The two entities should OTT together as a single option and register for VAT account for output tax as a single entity (usually a partnership even if it is not a partnership for any other purpose.).

Limited partnerships

Under the Limited Partnership Act 1907 every limited partnership must be registered with Companies House. A limited partnership is made up of one or more general partners, who have unlimited liability, and one or more ‘limited’ partners, who are not liable for debts and obligations of the firm. A limited partner is unable to take part in the management.

If there is only one general partner and one or more limited partners, the general partner is treated as a sole proprietor for VAT registration purposes. If there are two or more general partners and one or more limited partners, the general partners are treated as a partnership. It is the general partners who should OTT.

Limited liability partnerships (LLPs)

An LLP has separate legal status from its members and is able to enter into contracts in its own right. An LLP is a body corporate and is may register for VAT. If the partnership decides to OTT, one or more members, as the authorised signatory must sign the notification.

Authorised persons for particular legal entities 

In order for an OTT to be notified effectively, it must be signed and dated by an authorised person who possesses the legal capacity to notify a decision.

List of authorised signatories

Legal entity Authorised persons
Sole trader (proprietor) Owner of the business
Trust Trustee (or partner if VAT2 is completed)
Partnership (UK) Any partner (on VAT2)
Partnership (Scotland) Any partner
Limited partnership (UK) General partner
Limited partnership (Scotland) General partner
Limited Liability Partnership Designated member or member
Unincorporated Association Chairperson, treasurer, trustee or company secretary
Limited company Company director or company secretary
Community Interest Company (CIC) Company director or company secretary
Charitable Incorporated Organisation Director, chairperson, treasurer, trustee, or company secretary
Community Benefit Society Chairperson, treasurer, trustee or company secretary
Local Authority Section 151 officer (or Section 95 officer in Scotland), town clerk, head of finance, or treasurer
VAT group Director or company secretary of the group member that owns the property
Government department Nominated VAT liaison officer or finance manager (or a person senior to either)
Corporate body acting as a director, trustee or company secretary Any office holder or employee authorised by the corporate body (as long as the corporate body itself has authorisation from the owner the property)
Overseas entity Director or manager
Power of attorney Anyone granted a power of attorney to administer or manage the tax affairs of the owner of a property

Commentary

An invalid OTT may result in, among other things:

  • Input tax recovery being barred
  • A potential Transfer of a Going Concern (TOGC) becoming subject to VAT
  • VAT registration being denied
  • Unwanted complexity in transactions with the potential for a deal to be aborted
  • Costs in unwinding the VAT position (if firefighting is possible)
  • Uncertainty
  • Delays in transactions
  • A dispute between two sides to a transaction
  • Past input tax being the subject of clawback
  • The Capital Goods Scheme (CGS) being triggered resulting in VAT costs and complexity
  • HMRC levying penalties and interest

It is important to get the, seemingly simple, process of OTT right, and right first time!

VAT: Input tax incurred on the management of pension funds

By   1 July 2025
0

HMRC has published Revenue and Customs Brief 4 (2025), which provides information about changes to VAT deduction on costs incurred in respect of the management of pension funds.

The Brief explains a further policy change to VAT deduction on the management of pension funds – Employers can now claim all the VAT on investment costs linked to pension funds. HMRC will no longer view investment costs as being subject to dual-use. Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rule

They no longer need to split the costs with pension trustees. This was (prior to the introduction of the changes on 18 June 2025) a dual-use apportionment.

This Brief is relevant to:

  • businesses and other taxable entities that provide pension funds for their employees
  • pension administration and asset management service providers
  • pension fund trustees and pension providers
  • tax advisers

Impact on partial exemption methods

Businesses may need to propose new partial exemption special method (PESM) to align their VAT recovery with the new policy.

Background

HMRC’s historic policy was that employers could recover input tax they incurred on costs relating to the administration of their occupational pension funds, but not those in relation to the asset management of investments made by the fund.

Subsequently, HMRC changed its policy to allow employers recovery of input tax incurred on investment costs, provided that the employer could show evidence that they contracted and paid for the investment services.

HMRC has said that it will publish additional guidance on the new policy by Autumn 2025.

Commentary

This is very welcome news for managers of pension funds. It provides clarity and simplification in accounting, plus, more significantly; a much-improved VAT position whereby irrecoverable input tax can be avoided.

The HMRC climbdown is originally a result of the Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) CJEU case which considered an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund..