HMRC has updated is Form VAT2. The Form now requires each partner’s date of birth when an application to VAT register a partnership is made.
Guidance on registering partnerships here.
Registration of various legal entities – guidance here.
Tag Archives: latest-vat-news
VAT: Overages – new guidance
HMRC has issued new internal guidance on overages.
Land and property transactions are often complex and high value for VAT purposes. One area which we have been increasingly involved with is overages.
What is an overage?
An overage is an agreement whereby a purchaser of land agrees to pay the vendor an additional sum of money, in addition to the purchase price, following the occurrence of a future specified event that enhances the value of the land. This entitles the seller to a proportion of the enhanced value following the initial sale. Overages may also be called clawbacks, or uplifts.
Overages are popular with landowners who sell with the benefit of development potential and with buyers who may be able to purchase land at an initial low price with a condition that further payment will be made contingent on land increasing in value in the future – this may be as a result, of, say, obtaining Planning Permission.
VAT Treatment
HMRC consider that the VAT liability of overage should be considered separately from the VAT liability of the initial sale. HMRC’s policy is that the VAT liability of an overage payment will generally be determined at the time of supply of the overage payment, rather than when the original land sale completed.
Overage payments where an option to tax is made after the initial grant – where an option to tax is made after the property has been sold to the buyer, any subsequent overage payment may be liable to the standard rate of VAT as a result of VAT Act 1994, Schedule 10, Paragraph 31 (unless the option to tax has been disapplied, eg; where a property intended for use as a dwelling). In such situations, where the overage payment is made after the dwellings are constructed on the land, and the original grant was taxable by virtue of the option to tax, the option can be excluded in relation to the overage payment.
New commercial buildings – overage payments:
- Where there is a grant of a freehold interest in a new (or incomplete) commercial building, the overage will always be taxable at the standard rate – it does not become exempt simply because three years or more have elapsed since the building was completed. This will remain the position if the overage falls due after the designation ‘new’ has expired after three years.
- Where there has been a freehold sale of bare, un-opted land subject to an overage obligation, the liability of the overage payment will remain exempt even if a new commercial building is constructed on the site before the overage is paid.
This means that the VAT liability of the overage is determined by reference to the description of the land at the time that the original sale of the land takes place.
More on overages here. This covers HMRC’s previous views on overages .
Common VAT mistakes
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
- The default position is that a supply is standard rated unless it is specifically reduced rated, zero-rated, exempt or outside the scope of UK VAT
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
- Misunderstanding the VAT treatment of management charges
Partial exemption
- Not recognising partial exemption
- Using an inappropriate method
- Failing to carry out the annual adjustment
- Failing to make Capital Goods Scheme adjustments
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
- Late registration
- Exception from registration
- Misunderstanding pre-registration issues
- Failing to appreciate voluntary registration
- Deregistration issues
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
- Not recognising indirect tax obligations outside GB
- Not recovering VAT incurred overseas
- Place of supply misunderstandings
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
- Incorrect treatment of vouchers, gifts and discounts
Composite or separate supplies
- Treating a composite supply as individual supplies, or vice-versa
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
- Not applying Road Fuel Scale Charges correctly
- Incorrect input tax recovery on vehicle purchases/leases/repairs etc
Special schemes
- Failure to use the most suitable alternative schemes for accounting for VAT
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: Can Nitrous Oxide be zero-rated food? The Telamara case – no laughing matter
Latest from the courts
In the First-Tier tribunal (FTT) case of Telamara Limited the issue was whether Nitrous Oxide (N₂O) used exclusively for culinary use can be zero-rated.
Background
The appellant supplied N₂O canisters which were used as cream chargers. These were used for whipping cream and creating foams and mousses, and to infuse liquids. The relevant invoices described the product as; “Dairy products misc. Cream/beverage infusers 600 x 8g cylinder”. The chargers were not for medical use. The chargers were certified as Halal products.
Telamara’s customers were wholesalers and the units in which the chargers were sold were in boxes of 600. The packaging states that the contents of the chargers should not be inhaled. If consumed on its own N₂O is tasteless and all but imperceptible and its only effect is on the consistency of the whipped food.
The contentions
Telamara considered that the sale of the canisters should be zero-rated because they were for culinary use as food of a kind for human consumption via The VAT Act 1994, Schedule 8 VAT Act 1994, Group 1, Item 1. It was accepted that the N₂O would not be “eaten on its own” but it nevertheless was said to form an ingredient of all of the food substances into which it was incorporated by infusion or by use of the cream whipper, changing the state and nature of those foods. Furthermore, the appellant claimed unfairness because HMRC had been unable to provide clear guidance on the correct VAT treatment when the business started but HMRC subsequently became certain the supplies were standard rated.
Unsurprisingly, HMRC disagreed, formed a view that the supplies were not of food, and raised an assessment for the output tax it deemed to be due on the standard rated supplies.
Decision
The appeal was dismissed. It was found that the chargers were not food because N₂O:
- had no nutritional value
- is a food additive, not food
- does not add to the calories of food
- is odourless, colourless, and tasteless
- is a gas and therefore incapable of being either eaten or drunk
The Tribunal concluded that the gases were standard rated as they were not food of a kind used for human consumption. It concluded that no informed and broad-minded person considering whether the gases were food would conclude that they were.
Commentary
Yet another “Is it food?” case adding to a long list. The Tribunal helpfully set out (drawing from an extensive and thorough review of the very many cases which have considered the scope of zero-rating of food) the required exercise considering and weighing up the following factors to answer the question of whether something is food:
(1) Nutritional value
(2) Palatability
(3) Form of the product
(4) Manner of/directions for consumption
(5) Frequency of consumption
(6) Marketing
(7) Purpose of the product
(8) Range of uses
(9) Constituent ingredients
(10) Dictionary definition of food
Summary
Is it food? is not as a straightforward question as it may seem!
We recommend that any business which is involved in ‘food” or “food-like” products should undertake a review in light of this case. We can, of course, help with this .
VAT Bad Debt Relief Noticed updated
HMRC has updated VAT Notice 700/18 – Bad Debt Relief (BDR). The update covers how and when a claim may be made.
The Notice explains when a business is entitled to BDR and how to claim it.
If a business makes supplies of goods or services to a customer but it is not paid it may be able to claim relief from VAT on bad debts that it has incurred.
The conditions for claiming BDR are:
- a business must have accounted for the VAT on the supplies and paid it to HMRC
- a business must have written off the debt in its day-to-day VAT accounts and transferred it to a separate bad debt account
- the value of the supply must not be more than the customary selling price
- the debt must not have been paid, sold, or factored
- the debt must have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of the supply
- the deadline is within four years and six months of the later of the date payment was due and payable or the date of supply
These rules have varied over the years, so it is worth checking on supplies made before 1 April 1989.
To claim BDR a business includes the amount of the VAT being claimed in box 4 of its VAT return which covers the date when the conditions to make a claim are fulfilled.
If BDR has been claimed and subsequently a payment is received for the supply, a business must repay HMRC the VAT element included in the payment.
A VAT Did you know?
Wigs for teddy bears are subject to Customs Duty, but the Upper Tribunal ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free.
VAT: HMRC will no longer send letters
Tucked away in the recently published Spending Review 2025 was confirmation that HMRC will no longer contact taxpayers by post.
The Review states that:
“The government is providing an additional £500 million from 2026‑27 to 2028‑29 to make HMRC a digital-first organisation. By 2029-30, a minimum of 90% of customer interactions will be digital self-serve, up from around 70% this year. This investment will improve digital services so people can easily get the information they need without having to call or write to HMRC. It will enable the use of AI to help taxpayers with their enquiries and to raise productivity within HMRC. The government will continue to ensure alternative channels, including phonelines, are still there for those who need them. HMRC will eliminate all outbound post, with limited exceptions… ”.
So bye-bye snail-mail, trees will no longer have to be sacrificed so we can pay tax…
VAT: Error corrections – two new updates and a helpful flowchart
VAT Notice 700/45 How to correct VAT errors and make adjustments or claims has been updated. The Notice sets out how to amend a business’ VAT records if errors have been made, how to correct errors on VAT returns, and how to claim a refund if VAT declarations have been overstated. The changes are:
- information on how and when to correct VAT errors
- what happens if corrections are not made
- information about claiming input tax
- more information about how underpayments and overpayments are paid
- HMRC’s response time after receiving an error correction
- clarification of the unjust enrichment rules
- the reimbursement scheme
- how HMRC repays interest owed on overpayments
Additionally, HMRC’s guidance: Check how to tell HMRC about VAT return errors has been updated.
This guidance explains the requirements for updating a VAT return, and how to make a correction online or tell HMRC in writing about errors. The update states that it is no longer possible to correct errors on VAT returns using form VAT652.
Basically, the guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service or adjusting a current VAT return.
Please see our flowchart on error reporting Error Reporting Flowchart
VAT Land & Property: Who opts to tax? – Authorised signatories
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!
A VAT Did you know?
Popcorn is standard rated. DIY popcorn – corn which is popped in a microwave is VAT free. Don’t be lazy! 🍿