Tag Archives: input-tax

VAT: Holiday Lets – don’t get caught out

By Marcus Ward 10 July 2025

Further to the usual complexity with VAT and property, I have been increasingly asked about the VAT position of holiday lets, so, with the holiday season in full swing, this is a timely piece on the subject.

All residential letting is exempt… except holiday lets, which are standard rated at 20%. So, what is the difference? After all a house is a house, but the VAT treatment depends on how the property is advertised or “held out”.

If a property is held out for holiday accommodation, then the rental income is taxable.

What is holiday accommodation?

Holiday accommodation includes, but is not restricted to; any house, flat, chalet, villa, beach hut, tent, caravan or houseboat. Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. Also, increasingly, it is common for farms and estates to have cottages and converted barns within their grounds, which are exploited as furnished holiday lets so this use must be recognised for VAT purposes. Residential accommodation that just happens to be situated at a holiday resort is not necessarily holiday accommodation.

This treats holiday lets the same way as hotels, inns and B&B were VAT applies, which is fair.

Off-season lettings

If holiday accommodation is let during off-season, it should be treated as exempt from VAT provided it is let as residential accommodation for more than 28 days and holiday trade in the area is clearly seasonal.

What does this mean?

If the letting business exceeds the VAT registration threshold, currently £90,000, it must register for VAT. This usually means that either the business would lose a sixth of its income to HMRC or its letting fees would increase by 20% – which is not usually an option in a particularly price sensitive market. The only upside to registration is that VAT incurred on costs relating to the letting (input tax) would be recoverable. This may be on expenditure such as; agents’ fees, maintenance, refurbishments, laundry, websites and advertising etc.

Agents

If a property owner provides a property to a holiday letting agent and the agent itself provides the letting directly to the end users, this does not avoid the standard rating, even if the agent pays a guaranteed rent to the freeholder. This can catch some property owners out.

Sale of the property

When the owner sells the property, although it may have been used for standard rated purposes, the sale is usually treated as exempt. However, zero rating may be available for the first sale or long lease if it is a new dwelling with no occupancy restrictions. The sale of a “pure” holiday property is likely to be standard rated if it is less than three years old. To add to the complexity, it is also possible that the sale may qualify as a VAT free Transfer Of A Going Concern (TOGC). These are important distinctions because they determine, not only if VAT is chargeable, but, if the sale is exempt, there is usually a clawback of input tax previously claimed, potentially visa the Capital Goods Scheme (CGS).

Overseas properties

A final point: please do not forget overseas property lets. My article here sets out the tax risks.

Summary

There are a lot of VAT pitfalls for a business providing holiday lettings. But for a single site business, unless the property is large or very high end, it is likely that the income will below £90,000 and VAT can be ignored. However, it is important to monitor income and costs to establish whether:

registration is required
voluntary registration is beneficial (usually, but not exclusively, for major refurbishment projects).

VAT Notice 708: Buildings and construction updated

By Marcus Ward 1 July 2025

This Notice explains how to establish the appropriate VAT rate on building work and materials for contractors, sub-contractors and developers.

The construction of a new building and work to an existing building is normally standard rated. However, there are exceptions to this, inter alia:

construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities ― zero-rated
conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building ― zero-rated
alterations to suit the condition of people with disabilities ― zero-rated
first time gas and electricity connections ― zero-rated
conversion of a non-residential building into a qualifying dwelling or communal residential building ― reduced rate of VAT 5%
renovation or alteration of empty residential premises ― reduced rate of VAT 5%
installation of energy saving materials, grant funded heating system measures and qualifying security goods ― reduced rate of VAT 5%
installation of mobility aids for the elderly for use in domestic accommodation ― reduced rate of VAT 5%

(These are just some examples; other works may also qualify for zero or reduced rating)

Amendments

Paragraph 7 (re: the conversion of premises to a different residential use) on reduced rated work has been amended at para 7.6 as there was uncertainty over the previous drafting.

Paragraph 8.4 has been revised to more accurately reflect the rules on the installation of building materials which are reduce rated.

VAT: Input tax incurred on the management of pension funds

By Marcus Ward 1 July 2025

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..

VAT: Updated Notice – Local authorities and similar bodies

By Marcus Ward 10 June 2025

Notice 749 has been updated. This is guidance for Local authorities, government departments, non-departmental public bodies, NHS bodies, local government bodies, the police and the fire and rescue services.

It sets out:

which activities of local authorities and similar bodies are business or non-business for VAT purposes
the VAT registration requirements for local authorities
when local authorities and certain similar bodies can reclaim VAT incurred on costs that relate to their non-business activities

The changes amend:

Section ‘7.2 Insignificant proportion’ has been updated to remove a reference to VAT attributed and apportioned to exempt supplies.
Section ‘7.5 What to do if you want to opt for a special section 33 VAT recovery method to recover the VAT incurred’ the deadline for using a special section 33 recovery method has been changed from 31 October to 30 September following the end of the financial year.

Section 33 bodies

“Section 33 bodies” per The VAT Act 1994, section 33)

These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!

We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.

VAT: New guidance on exception from registration

By Marcus Ward 2 June 2025

HMRC has published new guidance which sets out how to apply for VAT registration exception if a business has temporarily exceeded the VAT registration threshold of £90,000 in any 12-month period (a rolling calculation).

What is registration exception?

If a business has a one-off increase in income it can apply for a registration exception. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsorily register the business for VAT. A business will need to formally apply to HMRC to make this exception official.

The guidance explains:

when to apply
how to apply
what happens after the application

Forms

A business will need to complete forms VAT1 and VAT5EXC in order to apply for registration exception. HMRC will write to the applicant within 40 working days of receipt with a decision.

If HMRC approves the application for exception

HMRC will not register the business for VAT. However, this is a ‘one-off’ and does not mean that the business will never have to register.

The value of taxable supplies must be checked every month, to establish whether they have exceeded the registration threshold. If they have, the business must:

register for VAT
apply for exception again

If HMRC refuses the application for exception

The response letter will explain why, and the information provided on the form VAT 1 will be used to VAT register the business. The applicant will need to account for VAT from the date it was liable.

VAT Planning: design and build

By Marcus Ward 6 May 2025

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.

New VAT road fuel scale charges from 1 May 2025

By Marcus Ward 6 May 2025

HMRC has published new Road Fuel Scale Charges (RFSC) for the period 1 May 2025 to 30 April 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.

VAT: Tribunal costs

By Marcus Ward 23 April 2025

Latest from the courts

In the First Tier Tribunal (FTT) case of Eurolaser IT Ltd regarding Kittel and Mecsek assessments and penalties:

whether an agent knew or should have known of fraud in supply chain – yes
whether such knowledge/means of knowledge to be attributed to Appellant – yes
whether Mecsek requires HMRC to show reasonable steps not taken by Appellant – yes
whether reasonable steps taken – no
unsurprisingly, the appeal was refused

one interesting aspect was the award of costs.

Generally, in FTT cases the rule is that each party will usually bear its own costs.

However, it is worth recapping how the award of costs works via The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. In this instant case, the Appellant had not ‘opted out’ of the costs protection regime set out in rule 10(c)(ii) of the Rules. Consequently, the FTT ordered that Eurolaser must pay HMRC’s costs – a sting in the tail. So, what are the rules? (Where relevant here)

Orders for costs

“10.—(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—

(a) under section 29(4) of the 2007 Act (wasted costs) [and costs incurred in applying for such costs];

(b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;

(c) if—

(i) the proceedings have been allocated as a Complex case under rule 23 (allocation of cases to categories); and

(ii) the taxpayer (or, where more than one party is a taxpayer, one of them) has not sent or delivered a written request to the Tribunal, within 28 days of receiving notice that the case had been allocated as a Complex case, that the proceedings be excluded from potential liability for costs or expenses under this sub-paragraph”

So, in “Complex” cases, an Appellant must submit a request that the case is excluded from the potential liability of costs being awarded, and HMRC must request repayment of its costs incurred in defending the case.

What are Complex cases?

These are complicated cases which:

require lengthy or complex evidence
require a lengthy hearing
involve complex or important principles or issues
involve large amounts or tax or penalties

such cases are allocated to a ‘track’ within the FTT system.

Other cost awards

It is also worth remembering that costs can be awarded if the appeal is brought unreasonably. This usually means that it is vexatious or frivolous, so proper advice should be sought when considering an appeal.

VAT Success Stories

By Marcus Ward 22 April 2025

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: EORI – What is it? Do I need one?

By Marcus Ward 10 April 2025

VAT Basics

HMRC has published new guidance on Economic Operator Registration and Identification (EORI) numbers. Although most of the guidance is not new, it is a reminder of what EORI numbers are and who needs them.

What is an EORI?

EORI is an acronym for Economic Operator Registration & Identification.

An EORI number is assigned to importers and exporters by HMRC (EOs) and is used in the process of customs entry declarations and customs clearance for both import and export shipments moving to or from the UK.

What is the EORI number for?

An EORI number is stored both nationally and on a central EU EORI database. The information it provides is used by customs authorities to exchange information, and to share information with government departments and agencies. It is used for statistical and security purposes.

A business may need to demonstrate to HMRC that it has carried out proper due diligence in certain cases.

Who needs an EORI number?

You will require an EORI number if you are planning to import or export goods. EOs can be sole proprietors, partnerships, UK incorporated companies, registered charities, and overseas companies. However, private individuals bringing their own possessions to or from the UK do not need an EORI number. An EO does not need to be VAT registered to have an EORI number.

For VAT groups, each member who imports or exports goods needs an EORI number.

Format of the EORI number

VAT registered companies will see the EORI as an extension of their VAT number. Your VAT nine digit VAT number will be prefixed with “GB” and suffixed with “000”.

How do I apply for an EORI Number?

Non VAT registered companies can apply using this link – FORM C220

VAT registered companies can apply using this link – FORM C220A

Once completed, your form should be emailed to: eori@hmrc.gsi.gov.uk

How long will my EORI application take?

The process is straightforward and EORI applications usually take up to three working days to process.

Please contact us if you have any issues with importing or exporting.

EORI checker

Gov.uk has provided a new tool to check a business’ EORI number. (This used to be an EU resource now not available due to Brexit).

Access

Who has access to an EORI number?

The general public can access limited data, When a business is notified of its EORI number, it will be asked whether it objects to this data being published on the site.