Energy saving: Insulation, solar panels, wind turbines, wood-fuelled boilers and air-source heat pumps are subject to a reduced rate of VAT at 5%, but the installation of secondary or double glazing is at the standard rate of 20%.
Tag Archives: VAT-5%
VAT Notice 708: Buildings and construction updated
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 – 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
Extension of VAT energy-saving materials relief
HMRC have published a new Policy Paper on the extension of energy-saving materials (ESMs).
Installations of ESMs in residential accommodation currently benefit from a temporary VAT zero rate until 31 March 2027, after which they revert to the reduced rate of VAT at 5%.
This measure extends the relief to installations of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.
It also expands the scope of the relief to the following technologies:
- electrical batteries that store electricity generated by certain ESMs and from the National Grid
- water-source heat pumps
- diverters that enable excess electricity from certain ESMs to be used within a building in which it is generated rather than exported to the grid
It also adds certain preparatory groundworks that are necessary for the installation of ground- and water-source heat pumps.
The changes apply from 1 February 2024
The policy objective is to incentivise the installation of ESMs across the UK to improve energy efficiency and reduce carbon emissions.
The measures are implemented by The Value Added Tax (Installation of Energy-Saving Materials) Order 2024.
VAT: Recovering input tax on the charging of EVs
Following my last article on charging Electric Vehicles (EVs) I have been asked about the rules on recovering VAT incurred by a business on such costs.
The current rules are:
VAT incurred by businesses when charging EVs can be recovered on the business use of those vehicles, where they are charged at work or at public charging premises.
A business can also recover the VAT for charging EVs if it is a sole proprietor or a partner in a partnership business, and it charges the EV for business purposes at home.
A business must calculate how much of the cost of charging its EV is for business use and how much is for private use by keeping mileage records. The normal input tax rules then apply.
If an employee charges an EV (whether a company vehicle or not) at a public charging point, the supply of electricity is made to the company or employer. The business can recover the VAT on the cost of charging the electric vehicle, subject to the normal rules.
Again, the employer must keep detailed mileage records to calculate how much of the charging cost is used for business and private purposes.
However, where an employee charges an EV (whether a company vehicle or not) at home, the overall supply of electricity is made to the employee and not the employer. The employer is not entitled to recover the VAT on the cost of charging the electric vehicle.
NB: We understand that HMRC’s view on this may be soon be challenged.
Current developments
- HMRC is currently reviewing the situation where an employee is reimbursed by the employer for the actual cost of electricity used in charging an electric vehicle for business purposes.
- The Department is considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use.
- The VAT rate applicable to public charging is 20%. We are aware that there could be a legal challenge to this and that the appropriate rate should be 5% (for all forms of EV charging). The reduced rate of VAT currently only applies to supplies of electricity to a person’s property which is less than 1,000 kilowatt-hours a month.
Hybrid cars are treated as either petrol or diesel cars for VAT purposes. The rules on input tax for petrol and diesel vehicles are here.
VAT: Fuel and Power Notice updated
HMRC Guidance: Fuel and power (VAT Notice 701/19)
This Notice has recently been updated. It now covers the VAT Reverse Charge measures for wholesale gas and electricity and construction services (Section 2) . There is more information about wholesale gas and electricity and using the VAT domestic Reverse Charge at section 3 of Notice 735: Domestic reverse charge procedure (VAT Notice 735).
Sections 4.1 and 4.3 now include more detail about hydrogen gas.
Brief overview
The reduced rate of VAT of 5% applies to supplies of fuel and power for qualifying use.
Qualifying use means:
- fuel and power for domestic use
- fuel and power for charity non-business use
- fuel and power where the amount supplied does not exceed the small quantities, called the de minimis limits
- fuel and power partly for qualifying use and partly for other purposes, where 60% or more of the supply is for qualifying use
Other supplies of fuel and power in the UK are standard rated.
VAT – Work on farm buildings
I am quite often asked if there are any VAT reliefs for farming businesses carrying out work to farm buildings.
Indeed, there are some areas of the VAT rules which may be of assistance to owners of farms and farm buildings. Clearly, the best position is to avoid VAT being charged in the first place. If this is not possible, then we need to consider if the VAT may be recovered.
Repairs and Renovations of Farmhouses
The following guidelines apply to businesses VAT registered as sole proprietors or partnerships. Where the occupant of the farmhouse is a director of a limited company (or a person connected with the director of the company) it is unlikely that any VAT incurred on the farmhouse may be recovered. The following notes are provided by HMRC after consultations with the NFU:
- Where VAT is incurred on repairs, maintenance and renovations, 70% of that VAT may be recovered as input tax provided the farm is a normal working farm and the VAT-registered person is actively engaged full-time in running it. Where farming is not a full-time business for the VAT-registered person, input tax claimable is likely to be between 10%–30% on the grounds that the dominant purpose is a personal one.
- Where the building work is more associated with an alteration (eg; building an extension) the amount that may be recovered will depend on the purpose for the construction. If the dominant purpose is a business one then 70% may be claimed. If the dominant purpose is a personal one HMRC would expect the claim to be 40% or less, and in some cases, depending on the facts, none of the VAT incurred would be recoverable.
Other farm buildings
As a general rule, when VAT is incurred on non-residential buildings, then, as long as they are used for business purposes, it would be expected that 100% of the VAT is recoverable. Care should be taken if any buildings are let and it may be that planning is necessary in order to achieve full recovery.
It should be noted that if any work to a building which is not residential results in the building becoming residential, eg; a barn conversion, then the applicable VAT rate should be 5%. If the resulting dwelling is sold then generally the 5% VAT is recoverable. If the dwelling is to be lived in by the person converting it; the VAT incurred may be recovered, but the mechanism is outside the usual VAT return and a separate claim can be made. In these circumstances it is not necessary for the “converter” to be VAT registered.
As may be seen, in many cases it will be necessary to negotiate a percentage of recovery with HMRC. We can assist with this, as well as advising on VAT structures and planning to ensure as much input tax as possible is either not chargeable to you, or is recoverable.
VAT: The importance of due diligence. The 50 Five (UK) Limited case
Latest from the courts
In the First Tier Tribunal (FTT) case of 50 Five (UK) Limited the issue was the VAT rate applicable to energy saving materials. An additional twist was that there was a sale of the business between the tax point of the relevant supplies and HMRC’s assessment.
Background
The appeal was brought in the name of the Appellant in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase. It had not been disclosed to them as part of the due diligence which was undertaken.
The Appellant’s business was that of supply and installation of heating and hot water systems. The customers were supplied with fully installed systems. The Appellant did not ask the customers to separately source the parts for such systems and then simply fit them. These supplies were treated as those of energy saving materials and the reduced rate of 5% was applied.
HMRC raised an assessment after taking the view that the supply should have properly been standard rated at 20%.
Decision
The FTT decided that legislation which permits the sale of energy saving materials at the reduced rate of VAT apply only where the supply of those materials is independent of an installation service. In this case, as the Appellant was the provider of the goods, and also the installer, the supply to the end customer was standard rated (a composite supply).
It was noted that this outcome was counter intuitive and the result does indeed seem unfair to the taxpayer, but as there was no reasonable prospect of the appeal succeeding, it was struck out. The assessment and interest was now payable by the new owners.
Commentary
An unfortunate outcome for the new owners, but it highlights three VAT issues:
- always carry out appropriate due diligence when buying a business. VAT is often an issue and if the buyer had discovered the assessment, it could have either abandoned the purchase, or negotiated on the price
- never assume that a lesser rate of VAT applies without carrying out appropriate research or seeking advice
- always consider whether a supply is separate or composite. This is a difficult area of the tax as the amount of case law testifies
The only recourse the new owners have now is taking action against the sellers of the business.
New VAT rate for hospitality
A reminder that a new VAT rate of 12.5% comes into force on 1 October 2021.
This is the first time this rate has been used and affected businesses should ensure that they are prepared.
The government announced on 8 July 2020 that it intended to legislate to apply a temporary 5% reduced rate of VAT to certain supplies relating to certain hospitality, supplies.
The reduced rate was initially introduced to last for a temporary period between 15 July 2020 and 12 January 2021. This period was subsequently extended to 31 March 2021.
The government then announced at Budget 2021 that the temporary reduced rate will be extended for a further six-month period at 5% until 30 September 2021.
A new reduced rate of 12.5% will then be introduced which will end on 31 March 2022. The scope of the relief will remain unchanged.
From 1 April 2022 the usual 20% standard rate will apply, unless there are further government concessions.
The 12.5% applies to
- hospitality: supplies in the course of catering including supplies of hot and cold food and drink to be consumed on the premises and supplies of hot takeaway food and drink to be consumed off the premises
- accommodation: the provision of hotel and holiday accommodation, pitch fees for caravan parks and tents and related facilities
- attractions: admission to attractions not covered by the cultural exemption.
The VAT Fractions
This is used to calculate the VAT element of a VAT inclusive figure.
5% = 1/21
12.5% = 1/9
20% = 1/6
Deposits
If a deposit is received, output tax will be calculated on the VAT rate in place at the time the deposit is received.
Other Issues
If a business supplies hospitality services and goods, but also makes sales not covered by the new rate, eg; alcohol, it must be able to identify the values at the different rates.
Does your accounting package have a defined 12.5% tax rate? It may be necessary to add this new rate to your software package.
VAT: Budget 2021 – hospitality, holiday accommodation and attractions
Further to my articles here and here the government have announced further measures for hospitality, holiday accommodation and tourist attractions.
These measures introduce
- an extension to the temporary reduced rate of VAT (5%) for a further 6 month period until 30 September 2021. A new reduced rate of will then be introduced until 31 March 2022.
- a new reduced rate of 12.5% will then be introduced which will end on 31 March 2022.
Aims
These changes are aimed at supporting the reopening of the economy following the outbreak of the coronavirus pandemic and help to re-establish habits such as eating out in restaurants.
The measures will help to protect an estimated 2.4 million jobs in these industries.