Tag Archives: exempt

VAT: Whether an online tool an ‘examination service’? The Generic Maths case.

By   12 May 2025
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Latest from the courts.

In the Generic Maths Limited First Tier Tribunal case the issue was whether the appellant’s product; ‘ConquerMaths’ amounted to examination services so to be exempt via The VATA 1994, Schedule 9, Group 6, Item 3.

Background

Generic Maths provided an online tool which was intended to be of benefit to students or their parents/teachers. The following facts concerning ConquerMaths were found:

  • it does not lead to any qualifications
  • users can drop in and out of the offering (unlike the way they might have to proceed if following a course leading to a qualification)
  • it includes many hundreds of available diagnostic tests that test students’ knowledge of the principles that will be taught on the various subjects
  • several short tutoring videos are included, although the number of videos is small in comparison to the number of diagnostic tests
  • the average user spends 75 minutes on diagnostic tests compared to five minutes on videos
  • the appellant’s witnesses described the product as diagnostic assessments, formative assessments, and summative assessments
  • in addition to the diagnostic tests, the product includes worksheets in an exam format. Pupils are encouraged to complete these offline and then feed the results into the system

The issue

Simply put; was the product predominantly a tool that provides assessments enabling those using the product to determine what level of maths ability the student has reached and identify any gaps in knowledge and therefore an exempt supply since it falls into the category “examination services”? Or, as HMRC contended, was it an online mathematical tutorial tool which was standard rated as it was a composite supply the predominant element of which was education and that the supply was not one of examination services? (There was no argument that these were exempt educational services).

The tests

The FTT considered that the correct test for determining the nature of the appellant’s supplies was an objective test, based on how they would be characterised by the typical consumer. On that basis, ConquerMaths was a teaching product designed to improve maths understanding, not an examination service.

Additionally, if the correct test was rather a functional test, the result would be the similar.

Decision

The Tribunal did not consider that the product was a supply of examination services within Item 3. It found that the assessment had been made using best judgment by HMRC and accordingly that the appeal should be dismissed.

Commentary

This is probably the correct decision, although the examination and education exemptions are open to interpretation. Care should be taken by taxpayers that the exemption is correctly applied. Although the definition of examination services is wider than formal public examinations, it was not wide enough to encompass ConquerMaths.

VAT Planning: design and build

By   6 May 2025
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Planning

The construction of a new house, and the materials used by the contractor to build it, are zero-rated. However, architect and other building professional fees, eg; surveyors, supervisors, engineers, project or construction management and consultants, are always standard rated; even in respect of a new build.

This will represent an absolute VAT cost to:

  • individuals
  • entities which will rent the house(s) after completion
  • housing associations (in some circumstances)
  • certain entities which are not in business
  • any entity which will use the building(s) for other exempt purposes
  • entities which do not sell the house(s) – so onward zero-rating is not possible
  • any entity which cannot recover all of its input tax for various reasons

Aims

If it is not possible to structure matters so that these fees can be recovered (there are a number ways to do this, but not all will be available to all parties) then advisers need to consider ways to remove the VAT charge – this may also be preferable for cashflow purposes even if full input tax recovery is possible.

VAT Planning

Design and build – the steps

  • the housebuilder creates a separately VAT registered design and build company (newco)
  • newco purchases the professional services and construction services and incurs the VAT on these (the construction element is zero-rated)
  • these supplies are incorporated into a single onward supply of zero-rated design and build services to the housebuilder (a bundle) – the professional services are a cost component of the construction
  • zero rating applies to the supply to the housebuilder as the predominant supply of the bundle is the construction of new dwellings
  • newco recovers the input tax incurred on professional fees etc, as it relates to an onward taxable supply
  • newco is in a repayment position and HMRC refunds the VAT incurred on the costs – often after a pre-cred query

It is also possible to use an independent design and build company, or engage a contractor to carry out both the design and construction elements of the project with a similar result.

Considerations

It is important to implement the planning correctly. This means that appropriate contracts must be in place, the operation is carried out on sound business principles (actual supplies are made and it is not simply the moving of money).

Arrangements

In order to evidence the proper commerciality of the structure, it is important to bear in mind that:

  • appropriate contracts are in place
  • proper invoicing is required
  • the arrangements are at arm’s length
  • a profit for newco would emphasise the commercial aspect
  • all parties’ accounts reflect the transactions
  • newco combines all of its costs (including overheads/admin etc) and supplies them to the housebuilder as part of a single package of zero-rated design and build services
  • newco acts as principal and not agent (that the professional services are not disbursements)
  • the newco and the housebuilder are not in the same VAT group
  • care should be taken if loans are required (they may compromise arm’s length and genuine commercial contentions)

HMRC’s view

In HMRC’s Internal Guidance Manual VCONST02720 it states that:

“Zero-rating the construction of buildings: services excluded from zero rating: design and build

Architectural or design services supplied as part of a design and build contract can be treated as part of the zero-rated supply of construction services.

A typical design and build contract will require the contractor to complete the design for the works and complete the construction of the works.

In such circumstances HM Revenue & Customs (HMRC) sees the design element as a cost component of the construction and not as a separate supply of architectural services which would be liable to VAT at the standard rate”.

Consequently, this planning is recognised and accepted by HMRC, however, it is important that it is applied effectively so it is difficult for HMRC to challenge.

VAT Success Stories

By   22 April 2025
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I often write about how it is important to seek VAT advice at the right time, see triggerpoints. So, I thought that I’d give some practical examples on where we have saved our clients money, time and aggravation.

Investment company

HMRC denied claims for input tax incurred on costs relating to the potential acquisition of an overseas business and threatened to deregister the plc as it was not, currently, making taxable supplies. Additionally, HMRC contended that even if VAT registration was appropriate, the input tax incurred did not relate to taxable supplies and was therefore blocked.

We were able to persuade HMRC that our client had a right to be VAT registered because it intended to make taxable supplies (supplies with a place of supply outside the UK which would have been taxable if made in the UK) and that the input tax was recoverable as it related to these intended taxable supplies (management charges to the acquired business). This is a hot topic at the moment, but we were able to eventually demonstrate, with considerable and detailed evidence that there was a true intention.

This meant that UK VAT registration was correct and input tax running into hundreds of thousands of pounds incurred in the UK was repaid to our client.

Restaurant

We identified and submitted a claim for a West End restaurant for nearly £300,000 overpaid output tax. We finally agreed the repayment with HMRC after dealing with issues such as the quantum of the claim and unjust enrichment.

Developer

Our property developing client specialises in very high-end residential projects in exclusive parts of London. They built a dwelling using an existing façade and part of a side elevation. We contended that it was a new build (zero rated sale and no VAT on construction costs and full input tax recovery on other costs). HMRC took the view that it was work on an existing dwelling so that 5% applied and input tax was not recoverable. After site visits, detailed plans, current and historical photograph evidence HMRC accepted the holy grail of new build. The overall cost of the project was tens of millions.

Charity

A charity client was supplying services to the NHS. The issue was whether they were standard rated supplies of staff or exempt medical services. We argued successfully that, despite previous rulings, the supplies were exempt, which benefited all parties. Our client was able to deregister from VAT, but not only that, we persuaded HMRC that input tax previously claimed could be kept. This was a rather pleasant surprise outcome.  We also avoided any penalties and interest so that VAT did not represent a cost to the charity in any way.  If the VAT was required to be repaid to HMRC it is likely that the charity would have been wound up.

Shoot

A group of friends met to shoot game as a hobby. They made financial contributions to the syndicate in order to take part. HMRC considered that this was a business activity and threatened to go back over 40 years and assess for output tax on the syndicate’s takings which amounted to many hundreds of thousands of pounds and would have meant the shoot could not continue. We appealed the decision to retrospectively register the syndicate.

After a four-year battle HMRC settled on the steps of the Tribunal. We were able to demonstrate that the syndicate was run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.” – A happy client.

Chemist

We assisted a chemist client who, for unfortunate reasons, had not been able to submit proper VAT returns for a number of years.  We were able to reconstruct the VAT records which showed a repayment of circa £500,000 of VAT was due.  We successfully negotiated with HMRC and assisted with the inspection which was generated by the claim.

The message? Never accept a HMRC decision, and seek good advice!

VAT: Are hair transplants ‘medical care’? – The Advanced Hair Technology Ltd case

By   12 March 2025
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Latest from the courts

In the Advanced Hair Technology Ltd First-Tier Tribunal (FTT) case the issue was whether hair transplants are exempt supplies of medical care, or were they for ‘cosmetic’ purposes and consequently standard rated?

Background

Advanced Hair Technology Ltd (AHT) was a  medical practice trading as The Farjo Hair Institute which specialised in hair restoration surgery. It treated conditions related to hair loss, in particular androgenetic alopecia (AGA). Dr Farjo who carried out the work is qualified is a medical practitioner with the Royal College of Surgeons. The output tax which HMRC deemed due was circa £2,500,000.

The sole issue was what AHT provided covered by the definition ‘medical care’?

Legislation

The VAT Act 1994, Schedule 9, Group 7, item 1 covers services which are for the primary purpose of protecting, restoring, or maintaining health: “medical care”.                                                                 

Contentions

AHT argued that it was treating patients for medical conditions, as opposed to providing aesthetic surgery and consequently, its supplies were exempt. The appellant explained that several patients believed that hair loss had affected their self-confidence and so the surgery improved their overall health (which includes a mental health element). Furthermore, the surgery helps to protect the skin from future photodamage, minor trauma and thermal insult.

HMRC contended that none of the patients had any recorded prior psychiatric conditions, eg; depression or anxiety, nor had any stated that they were looking to benefit from the surgery beyond it improving their appearance and confidence. Additionally,  no recipients of the treatment said that they were seeking any of the above physical protections.

Therefore, the treatment was a standard rated cosmetic procedure.

Decision

The meaning of ‘medical care’ was considered by the Court of Appeal in its decision in Mercy Global [2023] EWCA Civ 1073.

The court agreed with HMRC that a “principal purpose” test must be applied in all cases.

The evidence before the FTT was that by the age of 70 at least 80% of caucasian men suffer from hair loss as a result of AGA, and this is part of the normal process of aging. AGA is not considered a medical condition but rather a symptom.

AHT’s contention that the procedures serve a therapeutic purpose related to psychological issues was dismissed due to a lack of evidence from qualified practitioners. This reinforced the FTT’s view that the treatments were primarily cosmetic, rather than for medical reasons because altering one’s physical appearance was for aesthetic purposes.

The relevant supplies were therefore outside the exemption.

The appeal was dismissed.

Commentary

The judgment provides some guidance on the interpretation of the definition of medical care for the purposes of the exemption and follows similar recent cases which we covered here:

Skin Science

Skin Rich

X

The concept of the “provision of medical care” does not include medical interventions carried out for a purpose other than that of diagnosing, treating and in so far as possible, curing diseases or health disorders and it is the purpose of the medical intervention rather than merely the qualifications of the person providing it that is key in determining the VAT liability.

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of a certain club…

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts .

Interestingly, the judge here stated that the medical exemption may apply to some patients whose hair loss was a result of trauma caused by cancer treatment.

A VAT Did you know?

By   26 February 2025
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Under one VAT scheme, zero-rated and exempt supplies are subject to VAT – as are those which are “Outside the scope of UK VAT”.

Which, or course, makes entire sense.

Updated VAT Notice 701/30: Education and vocational training

By   3 February 2025
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This notice covers how VAT applies to; education, research, vocational training, examination services and goods and services connected with these activities.

More information on exempt education here.

Since 1 January 2025, all education services and vocational training provided by private schools in the UK for a charge have been subject to VAT at the standard rate of 20%. This also applies to boarding services provided by private schools. The Notice been updated to include these changes.

VAT: Property – The Option To Tax Guide

By   8 January 2025
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VAT Bsics

Opting To Tax commercial property

Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.

What is an option to tax (OTT)?

The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the OTT to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt (unless it is the first time sale of a new build – in which case it is zero-rated).

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken.  Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.

What to consider

The important questions to be asked before a property transaction are:

  • Was VAT incurred on the purchase price?
  • Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
  • Is the property subject to the Capital Goods Scheme (CGS here)?
  • Is it intended to spend significant amounts on the property, eg; refurbishment?
  • What other costs will be incurred in respect of the property?
  • If renting the property out – will the lease granted be full tenant repairing?
  • Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?

These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.

Input tax recovery

Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.

Two-part process

The OTT is a two-part process.

  • The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
  • The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.

There can be problems in cases where the OTT is taken, but not formally notified.

Timing

It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.

Disadvantages

As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.

  • opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
  • the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
  • an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.

Transfer of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.

Revoking an Option To Tax

  • The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
  • No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
  • 20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.

Summary

Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. Of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

New HMRC publications: VAT on cladding remediation work

By   6 January 2025
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In the aftermath of the horrific Grenfell fire, a lot of buildings require unsafe cladding to be replaced.

A new Brief clarifies HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. It sets out:

  • the reason VAT costs are incurred when carrying out remediation works to residential buildings with fire and safety defects
  • the circumstances in which the VAT incurred in providing remediation works can be recovered

Broadly, the distinction is whether the work qualifies as snagging. If it does, the VAT treatment follows the liability of the original building work – zero rated if the original construction was of a zero-rated new residential building, ie; they are supplied in the course of construction of a qualifying building.

If not snagging, the remedial work will be standard rated.

If the work is standard rated, it may be recoverable by the recipient in certain circumstances.

Snagging

HMRC’s definition of snagging is “the carrying out of remedial works to correct faulty workmanship or replace faulty materials”.  Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:

  • found soon after the building is completed
  • still covered by the building contract

More details on snagging here.

Furthermore, HMRC has published Guidelines for Compliance GfC11. This guidance covers HMRC’s existing policy on the VAT treatment of remedial works and includes:

  • the definition of snagging
  • an explanation of when you can recover input tax
  • examples to help you work out the VAT treatment of remedial works
  • examples of documents and evidence you should keep
  • information about correcting a submitted return

HMRC state that its policy has not changed.

VAT: Updated HMRC guidance on exemption for healthcare supplies

By   23 December 2024
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HMRC has published new guidance in its internal manual VATHLT2035.

It covers the services of the medical and paramedical professions: Anaesthesia Associates and Physician Associates.

Regulation for Anaesthesia Associates (AAs) and Physician Associates (PAs) came into effect on 13 December 2024. A full registration is required by December 2026. The exemption will only apply to the AAs and PAs that have joined from the date of registration.

Anaesthesia Associates

AAs are specialised practitioners trained to perform certain medical procedures related to anaesthesia under the supervision of qualified medical personnel. They are not doctors but play a crucial role in the healthcare system by assisting in the administration of anaesthesia and monitoring patients during surgical procedures. AAs are authorised to perform specific procedures they are trained and approved for. They will be regulated by the General Medical Council (GMC). Their services will be exempt from VAT, provided they are carried out for the purpose of medical care.

Physician Associates

PAs are healthcare professionals who support doctors in diagnosing and managing patients. They are trained to perform various medical procedures and provide care under the supervision of doctors. PAs are not doctors but are essential members of the multidisciplinary healthcare team, enhancing the capacity of healthcare services. They are meant to supplement, not replace, the role of doctors. Their services will be exempt from VAT, provided they are carried out for the purpose of medical care.

The exemption is via The VAT Act 1994, Schedule 9, Group 7.

VAT: Pre-registration activities

By   2 October 2024
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This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.

VAT Registration

The obligation to VAT register here and the pros and cons of voluntary registration here.

Sales

Between application and receiving a VAT number:

During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the relevant invoices showing VAT.

Purchases

Purchases made before registration:

Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.

There are time limits for backdating claims for input tax incurred before registration. These are:

  • four years for goods on hand at the time of the Effective Date of Registration (EDR), or that were used to make other goods on hand at the EDR. This includes both stock for resale or fixed assets
  • six months for services

Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).

The only VAT return on which such input tax is recoverable is the first.

Tip

When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.

The limit for backdating EDR is four years.

Irrecoverable VAT

Input tax cannot be reclaimed on:

  • goods that have been completely consumed before registration, eg; fuel, electricity or gas
  • goods that have been sold before registration
  • goods or services which relate to exempt supplies made, or to be made, by the registered business (see below)
  • services which related to goods disposed of before registration

NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.

The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.

Specific circumstances

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).

Included in the CGS are:

  • taxable land, property purchases of £250,000 or over
  • refurbishment or civil engineering works costing £250,000 or over
  • computer hardware costing £50,000 or over (single items, not networks)
  • aircraft, ships, and other vessels costing £50,000 or more

NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.

Pre-incorporation

A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.

A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.

Documentation

Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.

Legislation

The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.