Tag Archives: penalties

Updated VAT Notice 742A – Opting to tax land and buildings

By Marcus Ward 2 June 2026

HMRC has updated Notice 742A which explains the effect of an option to tax and will help a business decide whether to exercise that option. It also sets out whether an optor needs permission from HMRC before an option can be made and how to notify HMRC of a decision.

The update clarifies an important point: where opted land or building remain an asset on hand at the point of VAT registration cancellation, output tax must be accounted for on the value of that asset. The update also removes the information about a temporary change to the time limit for notifying an option as this has ended.

VAT Success Stories

By Marcus Ward 26 May 2026

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.

Restaurant

We identified and submitted a claim for a West End restaurant for nearly £200,000 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!

A VAT Did you know?

By Marcus Ward 29 April 2026

All alcoholic drinks are always standard rated. Alcohol-free beer and wines are similarly subject to VAT.

The penalty regime…the dark side of VAT

By Marcus Ward 29 April 2026

VAT Penalties

I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?

Overview

Broadly, a penalty is levied if the incorrect amount of VAT is declared, either by understating output tax due, or overclaiming input tax, or accepting an assessment which is known to be too low.

Amount of penalty

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.

An error, when reasonable care not taken: 30%;
An error which is deliberate, but not concealed: 70%;
An error, which is deliberate and concealed: 100%.

Reasonable care

There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.

HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore, a penalty may still be applicable.

Notification

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

What the penalty is based on

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty

The percentage penalty may be reduced by a range of ‘defences:’

– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance and encourage businesses which genuinely seek to fulfil their obligations.

Appealing a penalty

HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.

These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Even darker

There are even more severe penalties for deliberate acts, including significant terms of imprisonment. That is the subject of another article.

Assistance

My advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties. It is always worth running a penalty past us.

New VAT Road Fuel Scale Charges from 1 May 2026

By Marcus Ward 21 April 2026

HMRC has published new VAT Road Fuel Scale Charges (RFSC) which apply from 1 May 2026 to 30 April 2027.

These provide details on the charges from 1 May 2026 to be used on a business’ VAT return and must be used from the start of the next prescribed accounting period beginning on or after 1 May 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.

A business will need to calculate the correct RFSC based on a car’s CO2 emissions, and the length of its VAT accounting period. This will be either one, three, or twelve months. The CO2 emissions figure may be found here if the information is not available in the log book.

VAT: Crowdfunding – What is taxable?

By Marcus Ward 9 April 2026

What is crowdfunding?

Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet on specifically designed platforms and is an alternative to traditional ways of raising finance. The model is usually based on three parties: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organisation (the “platform”) that brings the parties together to launch the idea.

Crowdfunding is a major, growing source of funding for startups, charities, and creative projects, with the global market predicted to grow annually by around 15% from 2026 to 2033 with platforms like Kickstarter, Seedrs, Crowdcube, and GoFundMe being major players.

VAT Treatment

The VAT treatment of supplies that might potentially be made is no different to similar financing arrangements, for example; sponsorship, donations and investments made through more traditional routes. Whether a recipient of crowdfunding is liable to charge and pay VAT depends on the facts in each case.

Examples

Donations

where nothing is given in return for the funding, it will be treated as a donation and not liable to VAT – the position is the same where all that the funder receives is a bare acknowledgement, such as a mention in a programme or something similar

Goods and/or services

where the funder receives goods or services that have a real value associated with them, for example; clothing, tickets, DVDs, film viewings, output tax will be due

Combination

where the payment is for a combination of the two examples above, if it is clear that the donation element is optional then that part of the sponsorship can be treated as a non-taxable donation and the supply will be taxable. If a donation element cannot be carved out, it is likely that all of the payment will be considered as VATable

Investment

where the funding takes the form of an investment where the funder is entitled to a financial return such as; interest, dividends or profit share, any payment due to the funder is unlikely to be liable to output tax, The reason why most of these arrangements are outside the scope of VAT is that the provision of capital in a business venture is not seen as a supply for VAT purposes

Royalties

if the arrangement is that the funder receives royalties based on a supply of intellectual property or some other similar benefit the payment is likely to be consideration for a taxable supply and output tax will be due

Loan-based

Individuals lend money to businesses or people for interest payments. The making of any advance or the granting of any credit is exempt.

VAT registration

If income from the sources above which are deemed to be subject to VAT exceeds the VAT registration limit (currently £90,000 in any twelve-month period) the person, in whichever legal identity, such as; individual, company, partnership, Trust etc will be liable to register for VAT. If income is below this limit, it will be possible, but not mandatory to VAT register. The benefits of voluntary registration here.

Input tax recovery

If VAT registered, any input tax incurred on costs relating to crowdfunding is usually recoverable (see here for exceptions). However, if the costs relate to donations or some types of investment then input tax claims are specifically blocked as they would relate to non-business activities. If exempt supplies are made, attributable input tax is generally blocked unless it is de minimis.

Commentary

There can be difficulties in establishing the tax liability of crowdfunding and in a broader sense “sponsorship” in general. However, experience insists that the biggest issue is initially identifying that there may be a VAT issue at all. If you, or your clients are involved in crowdfunding, or have sponsors, it would be prudent to review the VAT treatment of the activities.

VAT: Recovery of input tax on fuel costs

By Marcus Ward 23 March 2026

Fuel costs

Road Fuel Scale Charge (RFSC) simplification.

It is common for a staff member to use a car for both business and private purposes (a staff member also covers sole proprietors and partners). Input tax is only recoverable in respect of the business use, so an apportionment is required. This may be done in the following ways.

Apply the RFSC. This is a set figure per month which represents a disallowance for private use and is repaid to HMRC
Keep detailed mileage records and only claim for the business element
If a business pays a mileage allowance for exact business miles travelled it may reclaim input tax on that actual payment. HMRC publish approved Advisory Fuel Rates, which are used to calculate the payments and the recoverable VAT
Do not make a claim at all (if business mileage is minimal or the administration outweighs the cost benefit)

Application

One RFSC must be applied for each car that is used both privately and for business. The fuel scale charges are calculated according to a car’s CO2 emissions and the fixed charge is added to the output figure on the VAT return.

A business will need to check the relevant car’s CO2 emissions figure. This is available for the car’s log book. For dual fuel cars, the lower of the two figures is used.

The calculation

The RFSC allows a business to account for the VAT on fuel in monthly, quarterly or annual returns. When calculating VAT on fuel, if the relevant car has a CO2 emission of 160g, and the business files quarterly returns, the VAT inclusive consideration for a three-month period is £363.00.

The RFSC for the private use of the vehicle will then be calculated as follows: £363.00 x 1/6 (the VAT fraction of the total figure) = £60.50

In this example, the VAT output tax due to HMRC is £60.50 and this is included in Box 1 of the VAT return.

This amount will compensate for any private use of fuel where VAT has already been claimed on the initial purchase of the fuel.

Notes

If a business uses the Flat Rate Scheme no VAT is reclaimable on fuel and no scale charge is applicable.

The RFSC does not apply to commercial vehicles (vans, lorries etc) however, if there is a significant level of private mileage, VAT claims should be adjusted to exclude input tax on this.

HMRC publish updated RFSC valuation tables annually. The latest table is here

Input tax claims may be restricted due to partial exemption or non-business activities.

Help

HMRC have also published a useful ready reckoner tool which assists with the process here

Mileage payments

If a business recovers input VAT based on mileage payments made to employees, it must ensure that employees submit fuel VAT receipts evidencing that they have incurred costs and VAT on fuel. Without such receipts, HMRC may deny the VAT recovery on mileage reimbursements. Clearly, the total VAT incurred on fuel must exceed the business element claimed.

EVs

Details on charging electric vehicles here and here

VAT: New, important HMRC guidance for zero-rating exports

By Marcus Ward 10 March 2026

HMRC has updated its Notice 703 which explains the conditions for VAT zero-rating exports of goods. It is crucial for a business to have the correct documentation to evidence goods physically moving out of the UK.

Information on official evidence has been updated in paragraphs 6.2, 7.1 and 7.2 as follows:

Para 6.2 Official evidence

Official evidence is an export declaration for the goods submitted to the Customs Declaration Service which has generated a departure confirmation. You will need the Movement Reference Number (MRN) or Declaration Unique Consignment Reference (DUCR) of the declaration.

Para 7.1 Air and sea freight
If you are using commercial transport documents as proof of export for goods exported outside the UK or EU by:
- air — you must obtain and retain an authenticated basic master airway bill or house air waybill endorsed with the flight prefix and number, and the date and place of departure
- sea — you must keep one of the copies of the bill of lading or sea waybill along with a note of the export declaration Movement Reference Number (MRN) or Declaration Unique Consignment Reference (DUCR) or, where a shipping company does not issue these, a certificate of shipment (certifying actual shipment) along with a note of the export MRN or DUCR, given by a responsible official of that company.

7.2 Road freight

The international consignment note provides evidence of the identity of the contracting parties when goods are transferred by road. It is in 3 parts and is completed and signed by the sender of the goods, the carrier and the person receiving the goods. If the international consignment note is used as part of the evidence, it is important that the information is complete and all the details legible. Where the overseas customer arranges for the goods to be collected ex-works the international consignment note alone is not conclusive evidence that the goods in question have left the UK. Read paragraph 6.6 for additional evidence required when making an indirect export.

Where goods leave through a port using the Goods Vehicle Movement Service, you should retain the Goods Movement Reference of the vehicle for that journey.

Failure to produce the appropriate and accurate evidence will result in output tax being due on the relevant goods.

VAT: Composite or separate supplies – The A & D McFarlane case

By Marcus Ward 10 March 2026

Latest from the courts

Yet more on composite or separate supplies. As a background to the issue please see previous relevant cases here here here and here. This is the latest the seemingly endless and conflicting series of cases on whether certain supplies are multiple or single.

In the First-Tier Tribunal case (FTT) of Alan and Diane McFarland the appellants operated a ‘bed and breakfast’ for other people’s cattle.

The issue

The VAT issue was whether there were separate supplies:

zero-rated supply of animal food
exempt supply of land.

Additionally, the appellant contended that the supply of animal food was a principal supply, and everything else, including the land, was ancillary.

HMRC took the view that there was a single taxable supply of ‘animal care’ and not separate supplies of exempt stabling and zero-rated feed. It also rejected the claim that the appellant had an exclusive right of occupation over any defined area, noting that there was no agreement conferring such a right with the consequence that this could not be an exempt supply. On the zero-rated animal foodstuffs point; HMRC concluded that the supplies do not qualify for zero-rating as the food provided formed part of the overall service of animal husbandry.

Legislation

Exemption: right over land or any licence to occupy land – The VAT Act 1994, Schedule 9, Group 1, item 1
Zero-rating: animal feeding stuffs – The VAT Act 1994, Schedule 8, Group 1, Item 2.

Decision

The FTT found that there was a single standard rated supply of ‘looking after’ cattle. The supply made by the appellant fell squarely within the Levob (Levob Verzekeringen BV [C-41/04]) category, being so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split. – HMRC notes on Levob here.

The supply was a fully integrated package of services directed towards the rearing and finishing of cattle. This included: daily mixing and provision of feed, management of water and housing, maintenance of handling facilities, statutory record‑keeping, and disease‑control obligations. These activities were inseparable in practice and indispensable for the operation of the recipient’s cattle‑finishing business. Neither the accommodation nor the feed, nor any other individual component, was offered or taken independently. There was a single price for the complete service. There was also a single invoice and a single description of the supply on the invoice. There was no indication on the invoice that both exempt and zero-rated services were being supplied.

The appellant provided a single composite service of animal rearing and management, to which all elements, including accommodation and feed, were merely constituent elements.

The Tribunal also dismissed the alternative argument of the that the supply of food was the principal supply, with all other elements, including accommodation and the wider activities being merely ancillary. The provision of food was not an aim in itself. The food could not sensibly be separated from the accommodation, handling, record-keeping and welfare-related functions that were also performed. It was, therefore, not the principal supply but an integrated component of the single composite supply.

The appeal was consequently dismissed.

Commentary

Yet another case on the perennial composite/single supply issue. This case was relatively straightforward and the outcome was no surprise. It is essential that businesses that potentially deal with agent/principal matters or make supplies at different VAT rates consider their position. Contracts, other documentation and the commercial reality need to be considered. We recommend that in such circumstances a review is carried out specifically to establish the correct VAT position .

Should I form a VAT Group? Pros and Cons

By Marcus Ward 17 February 2026

VAT Grouping

This is a very concise summary of matters that should be considered when deciding to form or disband a VAT. Grouping is optional although HMRC have powers to refuse an application in any case where it is necessary for the protection of the revenue.

What is a VAT group?

VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration) for VAT purposes. The measure was once restricted to “Bodies Corporate” which includes; companies of all types and limited liability partnerships. However, from 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases.

It is important to recognise the difference between a corporate group and a VAT group – these are two different things and it should not be assumed that a corporate group is automatically a VAT group.

It is worth remembering that it is possible to VAT group where no taxable supplies are made outside the group.

Pros

only one VAT return per quarter – less administration
the representative member accounts for any tax due on supplies made by the group to third parties outside the group. This is particularly helpful if accounting is centralised
no VAT on supplies between VAT group members. No need to invoice etc or recognise supplies on VAT returns
usually improves the partial exemption position if exempt supplies are made between group companies
may improve input tax recovery if taxable supplies are made to a partly exempt group company
if assets are hived up or down into a group company before a company sale to a non-grouped third party, the VAT consequences of the intra-group movement may be ignored
may provide useful planning opportunities/convenience at a later date
sales invoices issued, or purchase invoices received, in the wrong company name would not require time-consuming amendment
there may be cashflow benefits in respect of intra-group charges
reduced chance of penalties on intra-group charges

Cons

all members of the group are jointly and severally liable for any VAT due
former VAT group members are also liable for any VAT debts due during the period of VAT group membership
only one partial exemption de-minimis limit for group – which decreases the ability to fully recover input tax
obtaining all relevant data to complete one return may take time thus possibly missing filing deadlines
a new VAT number is issued (previous ones are cancelled – which may lead to administration etc issues)
the representative member needs all of the necessary information to submit a VAT return for the group by the due date
via anti-avoidance provisions, assessments can be raised on the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
the payments on account (POA) limits apply to the group as a whole. This applies to a business whose VAT liability is more than £2 million pa. This adversely affects a business’s cashflow
the cash accounting limit of £1,350,000 applies to the group as a whole (rather than each company having its own limit)
Transfers of Going Concerns (TOGCs) acquired by a partly exempt VAT group may result in an irrecoverable VAT charge as a result of a deemed self-supply
an option to tax made by a VAT group member is binding on all present and future members of the VAT group. This is so even after a company has left the VAT group

We strongly recommend that professional advice is taken when a business is either considering forming a VAT group, or when thought is being given to disbanding one. Making the wrong decision could be very expensive indeed. Specific matters that dictate VAT advice are when:

property is involved
inter-company charges are made
TOGCs are involved
costs in respect of restructuring are incurred (a current hot potato in the courts)
there is an international aspect to a group
a reverse charge applies
a company has been involved in the penalty regime
companies become insolvent
a VAT group is subject to POA
a company, or the VAT group, makes exempt supplies.

We are always happy to advise when required.