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.
Tag Archives: output-tax
VAT: Time to pay guidance updated
HMRC’s guidance: How to pay a debt to HMRC with a Time to Pay arrangement was updated on 17 February 2025. This covers businesses which owe a debt to the department.
The updates cover:
- Information about when a payment plan can be set up without contacting HMRC has been added.
- Section ‘How we work out debt repayments’ has been removed as the information is covered in the section
- Information to work out what businesses can afford to pay has been updated in the section ‘How we work out what you can afford to pay’.
If a business owes VAT
It can set up a payment plan to spread the cost of its latest VAT bill online without calling HMRC if it:
- has missed the deadline to pay a VAT bill
- owes £100,000 or less
- plan to pay its debt off within the next 12 months
- has a debt for an accounting period that started in 2023 or later
- does not have any other payment plans or debts with HMRC
- has filed all your tax returns
More information here: set up a payment plan online.
How to contact HMRC to discuss a Time to Pay arrangement
If a business cannot pay its tax bill and needs assistance (ie; the online arrangements above are not applicable) we recommend that it should contact HMRC as soon as possible.
VAT: When is a bar a bar? – The Anglia Ruskin Students’ Union case
Latest from the courts
A student union tried to argue that a bar is not a bar. It did not go well.
In the case of The Anglia Ruskin Students’ Union the High Court considered the appellant’s application for judicial review of HMRC’s decision that “92” which was operated on the university’s campus was a bar.
The importance of this description of the venue was that if it was indeed a bar, the supplies from it would be standard rated. This is because the supplies of catering to students by eligible bodies, including universities”, are exempt from VAT, on the basis that the supplies are closely related to exempt supplies of education, however, the exemption does not cover food and drink sold in bars.
The union contended that ‘bar’ means a place that does not supply catering, or, alternatively, predominantly or mainly serves alcohol.
HMRC, predictably argued that a bar is “somewhere where one can buy and drink alcoholic and other drinks, as well as food”, and that 92 met that definition.
The court agreed with HMRC that the bar was indeed a bar and did not grant permission to appeal.
So, now we know, a bar is a bar, not a café… or anything else really.
Technical
* Student unions often provide catering alongside universities. Since March 2002, HMRC has operated a published concession extending the exemption granted to supplies of catering made by universities to student unions.
VAT – Fuel and power guidance updated
HMRC has updated its notice Updated its Notice 701/19: Fuel and power.
The Notice explains how suppliers and users should treat supplies of fuel and power for VAT purposes and it sets out how to treat a number of other supplies connected with fuel and power.
The update provides more detail of supplies for domestic use.
Supplies of fuel and power for domestic use are eligible for the reduced rate of 5%.
The provider must be certain that the supply is to a dwelling or certain types of residential accommodation. Examples of allowed residential accommodation are:
- armed forces residential accommodation
- caravans
- children’s homes
- homes providing care for the elderly or disabled, people with a past or present dependence on alcohol or drugs or people with a past or present mental disorder
- houseboats
- houses, flats or other dwellings
- hospices
- institutions that are the sole or main residence of at least 90% of their residents
- monasteries, nunneries and similar religious communities
- school and university residential accommodation for students or pupils
- self catering holiday accommodation
The following buildings are not considered residential accommodation for the purposes of fuel and power:
- hospitals
- prisons or similar establishments
- hotels, inns or similar establishments
Updated VAT Notice 701/30: Education and vocational training
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.
A VAT Did you know?
Children’s clothing is zero rated. But where a child has one foot larger than the other, the pair of shoes can be zero-rated if the smaller shoe qualifies as a child’s size (boys 6 1/2 and girls; generally, size 3).
VAT: Supply of self-contained apartments covered by TOMS? The Sonder UT case
Latest from the courts
In the Upper Tribunal (UT) case of Sonder Europe Limited (Sonder) the issue was whether apartments leased to Sonder and used to provide short-term accommodation to corporate and leisure travellers were supplies of a designated travel service via the Tour Operators’ Margin Scheme (TOMS) and whether the bought-in supply was used for the direct benefit of travellers (as required by TOMS).
Background
Sonder leased apartments from landlords on a medium to long-term basis and used them to provide accommodation to travellers on a short-term basis (one night to a month; the average stay being five nights). Sonder furnished some apartments as well as undertaking occasional decorating and maintenance.
The sole issue was whether these supplies are covered by TOMS. TOMS is not optional.
Initially in the FTT it was decided that output tax was due via TOMS. This was an appeal by HMRC against that First Tier Tribunal (FTT) decision.
The issue
Whether VAT was accountable using TOMS – on the margin, or on the full amount received from travellers by Sonder.
Legislation
TOMS is authorised by the VAT Act 1994, section 53 and via SI 1987/1806.
Arguments
Sonder contended that the supply was “for the direct benefit of the traveller” as required by the VAT (Tour Operators) Order 1987 and that the accommodation was provided “…without material alteration or further processing”. Consequently, TOMS applied. The FTT decided that Sonder did not materially alter or process the apartments.
HMRC maintained that the FTT decision was based on the physical alternations made rather than the actual characteristics of the supplies. Consequently, these were not supplies covered by the 1987 Order and output tax was due on the total income received for these services.
Decision
The UT upheld HMRC’s appeal and decided that TOMS did not apply n these circumstances The UT found that the FTT’s decision was in error in that it did not have regard to whether the services bought in were supplied to it for the direct benefit of travellers. Furthermore, the short-term leases to occupy property as holiday accommodation were materially altered from interests in land for a period of years supplied by the landlords.
The services received by Sonder from the landlords were not for the direct benefit of the travellers and Sonder’s supplies were not for the benefit of the users without material alteration and further processing. Consequently, there was not a supply of bought-in services, but rather an ‘in-house’ supply which was not covered by TOMS.
To the UT, the position was even clearer in relation to unfurnished apartments. Sonder acquired an interest in land for a term of years in an unfurnished apartment. It furnished the apartment and then supplied a short-term licence to a traveller to occupy as holiday accommodation. What was supplied to the traveller was materially different to what was supplied to Sonder.
Commentary
Another illustration of the complexities of TOMS and the significant impact on a business of getting the rules wrong. The fact that the UT remade the decision demonstrates that different interpretations are possible on similar facts. Moreover, even slight differences in business models can result in different VAT outcomes.
VAT: Digital platform reporting
VAT and digital platforms
Via section 349 of the Finance (No.2) Act 2023, measures were introduced which require certain UK digital platforms to report information to HMRC about the income of sellers of goods and services on their platform. HMRC then exchange this information with the other participating tax authorities for the jurisdictions where the sellers are tax resident.
Under the Organisation for Economic Co-operation and Development (OECD) rules, digital platforms in participating jurisdictions will be required to provide a copy of the information to the taxpayer to help them comply with their tax obligations.
Now HMRC have recently (last month) issued a new series of guidance , or updated guidance, on digital platform reporting, which are:
Selling goods or services on a digital platform
This Guidance explains the details a business needs to give to digital platforms when selling goods or services in the UK. A section on what information sellers will receive from online platforms has been added.
It covers:
- who is a seller
- information which must be provided
- reporting by platforms
- information to be received
- selling online and paying tax
Check if you need to carry out digital platform reporting
This guidance provides information on:
- what qualifies as a digital platform
- who should register
- how to register
- what needs to be reported
- information required for reporting
- carrying out due diligence
- when to report
- penalties
Register to carry out digital platform reporting
This sets out:
- who should register
- what you need to do
- how to register
- after you have registered
Managing digital platform reporting
This provides guidance on:
- submitting reports to HMRC
- ongoing account management
- when to report
- how to add or change a platform operator
- how to add or change a reporting notification to tell HMRC if you are a reporting or excluded platform operator
- how to add or change a reporting notification about the type of due diligence you choose
- changing contact details
- how to add team members
- how to inform HMRC that another platform operator will report for you (assumed reporting)
VAT: Property – The Option To Tax Guide
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
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.