Oils and fats used for animal food is zero-rated, unless it is waste oil from a fish and chip shop – which is standard rated… even if it is used to feed animals.
Tag Archives: vat-claim
VAT treatment of lost, stolen, damaged or destroyed goods
Is output tax due on goods that, for various reasons, cannot be sold, or are sold at a discount?
HMRC says that the VAT treatment depends on whether or not there was actually a supply of goods, what happened to them, who was responsible for them at the time and whether a VAT invoice was issued. The value of any supply will also need to recognise any credit given to the customer.
So, as often is the case with the tax, the answer is: “It depends”. So, let’s look at the categories to find out:
Lost goods
This depends on who lost the goods.
Sometimes a business will sell goods to a customer, but they did not receive them because they went astray. This could happen, for example, if goods are lost in the post.
- customer is responsible for loss
If the customer is responsible for any losses before the goods are delivered, then VAT is due on the full amount of the sale.
- supplier responsible for loss
If the supplier is responsible for any losses before the goods are delivered, then the way VAT is dealt with will depend on whether an invoice has been issued.
If an invoice has been issued, output tax is due on the amount invoiced, less the value of any credit given to the customer. So, if credit has been given a full refund, no VAT will be due.
If no invoice has been issued, there is no VAT due. This is because nothing has been supplied. It is prudent to make a note in the business records that the goods were lost an no invoice was raised.
Stolen goods
If goods are stolen from a business’ premises no VAT is due – as long as any customer has not been invoiced. HMRC are very likely to examine such circumstances as it is sometimes used as an ‘excuse’ for underdeclarations. Consequently, we always advise businesses to hold as much evidence as possible to support a claim that theft has taken place.
Goods stolen from a supplier’s premises after they have been sold to a customer- If the contract with the customer means that they are responsible for the goods while they are on the supplier’s premises – there has been a supply and output tax is due.
If the customer is not responsible for the goods when they are stolen, then if:
- a VAT invoice issued – VAT is due on the amount invoiced (but subject to subsequent amendment to the quantum)
- no invoice has been issued – there is no VAT due because there is no supply
NB: If cash is stolen from a business, this does not reduce the value of output tax on any supply.
Fraud
If goods are lost due to fraud it can be difficult to demonstrate or evidence. To avoid paying output tax on goods lost to a fraud a business is required to:
- report the incident to the police
- contact HMRC and give them the case details – this will entail providing a crime or case reference number given by the police. HMRC will consider each case and advise appropriately
Damaged goods
Damaged goods may be sold on at a discounted price, or they might have some scrap value. Output tax is due on whatever income is received for the goods sold. If an insurer makes a payment in respect of the damage, no VAT is due on this income.
Destroyed goods
If goods are destroyed such that they cannot be sold, and these are handed over (or what is left of them) to the insurer, no VAT is due on the disposal. Furthermore, there is no output tax due on any money received from the insurer. HMRC will need to see evidence of the insurance claim, and details of any insurance payment, on their next inspection of the business.
Records
Maintaining meticulous records is crucial for VAT compliance and it is very likely that such issues will be examined closely on HMRC inspections. This is because unexpected reductions in output tax will usually trigger enquiries. Input tax claims for the original purchase of the goods will be unaffected, so any mark-up type exercise will flag up the discrepancy.
More on illegal activities here.
VAT: Insolvency update
HMRC has updated its Insolvency Practitioner Bulletin.
It sets out changes that have been made to form VAT 7 to help insolvency practitioners provide important information and provides explanations of questions on the form.
HMRC has changed the way it issues VAT repayments to insolvency practitioners from Monday 10 March 2025.
An update of the VAT 7 form includes a section to input bank details. It is important to ensure that the most recent version of the VAT 7 is used. This may be found at section 6.2 on Insolvency VAT Notice 700/56.
VAT Returns: A box-by-box guide
VAT Basics
Return boxes explained – what goes where? A general overview.
Box 1 VAT due in the period on sales and other outputs
The amount of VAT due on all goods and services supplied in the period covered by the return. This is output tax. The value of output tax may be affected by VAT:
- on credit notes issued
- when refunds are made
- on goods taken in part-exchange
- underdeclared or overdeclared on previous returns within certain de minimis
VAT may also be due on supplies outside the mainstream of a business, eg:
- fuel used for private motoring where VAT is accounted for using a scale charge
- the sale of stocks and assets
- goods taken out of the business for private use
- VAT due under a reverse charge
- supplies to staff
- gifts of goods that cost more than £50
- certain distance sales to Northern
- commission received for selling something on behalf of a third-party
- VAT shown on self-billed invoices issued by your customer
- VAT due on imports accounted for through postponed VAT accounting
Box 2 VAT due in the period on acquisitions of goods made in Northern Ireland from the EU
Since 1 January 2021, a business is only allowed to make acquisitions on goods brought into Northern Ireland from the EU. For acquisitions, the VAT due on all goods and related costs bought from VAT-registered suppliers in the EU should be included.
Box 3 total VAT due
Show the total VAT due, the total of boxes 1 and 2. This is the total output VAT for the period.
Box 4 VAT reclaimed in the period on purchases and other inputs
Show the total amount of deductible VAT charged on business purchases. This is input tax for the period.
This will include:
- VAT paid on imports
- imports accounted for through postponed VAT accounting.
- claims for bad debt relief (BDR)
- payments on removals from a warehousing regime or a free zone
- VAT shown on self-billed invoices issued by you
- acquisitions of goods into Northern Ireland from the EU
Certain VAT paid by a business should not be included in box 4, some examples here.
Adjustments to the amount claimed may be required for
- VAT on any credit notes received
- certain VAT underdeclared or overdeclared on earlier returns
- partial exemption
Box 5 net VAT to pay or reclaim
Deduct the smaller from the larger of values in boxes 3 and 4 and enter the difference in box 5.
If the figure in box 3 is more than the figure in box 4, the difference is the amount payable to HMRC. If the figure in box 3 is less than the figure in box 4, HMRC will repay this.
Box 6 total value of sales and all other outputs excluding any VAT
Show the total VAT exclusive value of all business sales and other specific outputs. These will include:
- zero-rated, reduced rate and exempt supplies
- fuel scale charges
- exports
- distance sales to Northern Ireland which are above the distance selling threshold or, if below the threshold the overseas supplier opts to register for VAT in the UK
- reverse charge transactions
- supplies which are outside the scope of UK VAT (this is debateable, but HMRC require this information)
- deposits that an invoice has been issued for
- net value of the road fuel scale charge
Box 7 total value of purchases and all other inputs excluding any VAT
Show the total net value of expenditure. This will include:
- imports
- acquisitions of goods brought into Northern Ireland from the EU
- reverse charge transactions
- capital assets
Boxes 8 and 9 only need to be completed goods cross the Northern Ireland border.
Box 8 value of supplies of goods to the EU
For supplies of goods and related costs, excluding any VAT, from Northern Ireland the EU made from 1 January 2021.
Box 9 value of acquisitions of goods from the EU
For acquisitions of goods and related costs, excluding any VAT, from the EU into Northern Ireland from 1 January 2021.
NB: If a business uses one of the following schemes there may be different rules for completing some of the boxes on returns.
- flat rate scheme
- cash accounting
- annual accounting
- margin schemes for second hand goods, works of art, antiques and collectors’ items
- payments on account.
VAT: Input tax claims – alternative evidence
What can be used to make a claim?
It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.
HMRC has discretion provided by legislation: VAT Regulations 1995/2518 Reg 29(2). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.
Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.
Full details of tax invoices here.
What HMRC consider
HMRC staff are required to work through the following checklist:
- Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
- Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
- Does the business have evidence of payment?
- Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
- How did the business know the supplier existed?
- How was the business relationship with the supplier established? For example: How was contact made?
- Does the business know where the supplier operates from (have staff visited?)
- How did the business contact them?
- How does the business know the supplier can supply the goods or services?
- If goods, how does the business know they are not stolen?
- How does the business return faulty supplies?
Outcome
If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC is required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities
Challenge HMRC’s decision
A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.
Case law
Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce Scandico Ltdv and Wasteaway Shropshire Limited.
Tips
If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.
If you, or your clients are in dispute with HMRC on input tax claims, please contact us.
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
HMRC late payment interest rates reduced
HMRC interest rates for late payments are to be revised following the Bank of England interest rate cut.
The Bank of England Monetary Policy Committee announced on 6 February 2025 to reduce the Bank of England base rate to 4.5% from 4.75%.
HMRC interest rates are linked to the Bank of England base rate. As a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will reduce.
These changes will come into effect on:
- 17 February 2025 for quarterly instalment payments
- 25 February 2025 for non-quarterly instalments payments
How HMRC interest rates are set
HMRC interest rates are set in legislation and are linked to the Bank of England base rate.
Late payment interest is currently set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit – or ‘minimum floor’ – of 0.5%.
The differential between late payment interest and repayment interest is in line with the policy of other tax authorities worldwide and compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.
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: Chatbots failure
Further to our article on HMRC using chatbots, reports have emerged that they are working less than 50% of the time and that the resolution rate is only 21% even once a connection is established.
It is clear that the attempt to move services online has caused significant issues for taxpayers and advisers.
A recent survey by the Association of Chartered Certified Accountants discovered that nearly 9 in 10 business owners (89%) said poor levels of service at HMRC is having a negative impact and causing a ‘huge roadblock’.
This is even more infuriating for people wishing to contact HMRC because the issue has been exacerbated by the restricted access to HMRC telephone helplines and the closure of the VAT registration helpline used by taxpayers and accountants.
VAT: Property – The Option To Tax Guide
VAT Basics
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