Tag Archives: vat-errors

VAT: Changes to the Capital Goods Scheme

By   13 July 2026
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HMRC has produced a policy paper on the simplification of the Capital Goods Scheme (CGS).
The CGS is a mechanism for adjusting an input tax claim which requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases, it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.

HMRC says its measure details the simplification of the CGS to reduce the administrative burden for VAT registered businesses.

From 29 July 2026:

  • computers and items of computer equipment will be removed from the list of assets covered by the scheme
  • the expenditure threshold for land, buildings and civil engineering work will increase from £250,000 (exclusive of VAT) to £600,000 (exclusive of VAT).
Existing assets and expenditure incurred before that date will continue to be treated under the current rules.
The Value Added Tax (Amendment) Regulations 2026 has been made to implement these changes.
The lifting of the CGS threshold for land and buildings is long overdue, but nevertheless welcome.

VAT on mobile phones – update

By   3 July 2026
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HMRC has updated Notice 700 to reflect the type of mobile ‘phone contracts and packages currently available and the VAT treatment of them. Details below, however, the salient issue with the update is that no input tax recovery is available if an employee has a contract in their own name (not the business itself).

VAT on the purchase or lease of a mobile phone

If a business provides its employees with mobile phones for business use, it can treat the VAT it incurs on purchasing or leasing a phone as input tax. This includes line rental charges where applicable, regardless of whether private use is allowed.

VAT on mobile phone call package and other charges

Business only

If a business incurs a recurring fixed monthly fee covering a package of calls, SMS and data, HMRC accepts that all the input tax incurred is recoverable.

If a business does not allow its employees to make private calls, all of the VAT incurred on call charges is input tax. HMRC accepts this where the business has clear rules prohibiting private use and enforces those rules.

HMRC accepts minimal private use as insignificant for VAT purposes and will not prevent the business from recovering all the VAT incurred on calls and mobile phone packages as input tax.

Charges for private calls

If a business charges employees for private use of their mobile phone it may treat the VAT incurred on that use as input tax but must account for output tax on the amounts charged.

If a business allows private use without charge, it must apportion the VAT incurred and recover only the part that relates to business use. 

Method of apportionments

Businesses can choose any apportionment method that suits their circumstances, provided it produces a fair and reasonable result. 

VAT on broadband connections

Where a business enters into a contract and pays for a fixed monthly charge for a broadband connection either mobile or cable to an employee’s home to enable them to work remotely, input tax can be recovered on the cost of providing the connection. This also applies to routers, installation charges and call bundles.

Some private use usually occurs, eg; entertainment packages or out of bundle charges etc. In such cases an apportionment should be made to restrict input tax recovery to only the business use of the service.

Mobile phone or broadband costs bought by the employee.

Where a business pays for a mobile, broadband or a package contract entered into by an employee with the service provider, no input tax is recoverable by the business. This is because the contract for the supply of services is between the provider and the employee, meaning the supply is made to the employee rather than to the business.

A VAT Did you know?

By   16 June 2026
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If you buy a hamster or gerbil in a pet shop, you will pay tax on it but if you buy a rabbit, it will be VAT free.

VAT: Consignment and call-off stock

By   15 June 2026
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VAT basics

Consignment, call-off stock, and sale or return goods

If a business is required to provide regular sales of goods to customers, a prudent business structure is to keep inventory in a warehouse near the customer, or which belongs to the customer. This is likely to reduce transport costs and provides quicker access to the goods thus reducing time in the supply chain.  There are specific VAT rules for businesses which hold stock in foreign countries. They stipulate when, and what VAT should be charged, and if a business needs to VAT register as a non-resident trader in another country in which it is warehousing its goods.

Below we consider what the terms mean, the differences and the VAT treatment applicable.

Differences 

There is often confusion over the terms; consignment and call-off stock, and they are sometimes used interchangeably. They are differentiated based on who controls access to, and use of, the goods. The difference determines the VAT requirements and compliance rules, so it is important to identify the actual arrangements a business has in place, or plan for the most beneficial outcome. Both of these measures involve the transfer of a business’ own goods – for the purposes of this article; cross-border. The transfer of goods within the same legal entity from one country to another is a deemed supply. This fact is sometimes missed, which can lead to problems.  The VAT rules differ from country to country and create legal uncertainty for businesses. 

In summary

  • Consignment stock

Consignment stocks are created when a business transfers its own goods to another Member State to create a stock over which it has control and from which it makes supplies. Typically, there are multiple potential customers for consignment stock.

Note: Goods sent to an overseas customer on sale or return are treated in the same way as consignment stocks.

  • Call-off stock

Call-off stock is the transfer of goods by a business from one Member State to another to create a stock of goods from which its customers can ‘call-off’ ie; use and pay for the goods as and when they require them.

Not call-off stock

Goods delivered to storage facilities operated by the supplier, rather than the customer, should be treated as consignment stocks (see above). If stocks of goods are dispatched by a supplier for call-off by more than one customer, this is also likely to be consignment stock.

VAT treatment

Consignment stock

There is an initial deemed supply of own goods to form the stock which takes place in the country from which the goods are originally shipped. This is usually VAT free as a dispatch and the usual documentary requirements apply.

The place of subsequent supplies of the goods, once a buyer has been found (change of ownership) is usually the country in which the stock is held.

Because the business is transferring its own goods “to itself” in another country it will be making an acquisition of goods in that country. The business is likely to be liable to register for VAT there (or appoint a fiscal representative in the country of arrival) and be responsible for import obligations in the other country. Output tax will also be due (at the rate of VAT applicable in the country in which the goods are located) on the sale to a third party.

Consignment stock – reporting requirements

If a UK VAT registered business transfers goods to another country to create a consignment stock it must complete box 6 on the VAT return reporting a value based on the cost of the goods – see HMRC Public Notice 725. 

Call-off stock

As the customer has control of the goods in storage, is aware of stock movements, and may take stock whenever he requires this does not generally require the seller to VAT register in the foreign country as a non-resident trader. Such sales are treated as a “regular’ export and the seller is required to show the customer’s VAT number etc on invoices and other documentation in order to treat it as VAT free in the usual way. The time of supply for these supplies is the date the goods are called off by the customer. 

Call-off stock – reporting requirements 

The supply of call-off stock from the UK to a VAT registered business in another country is VAT free (subject to the normal rules). Box 6 of the VAT return should be completed using a value based on the cost of the goods as above.

Business Entertainment VAT Notice 700/65 updated

By   9 June 2026
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HMRC Notice 700/65 has been updated. The ‘Business entertainment’ section has been amended to confirm persons who are, and are not, employees for the purpose of the recovery of input tax incurred on business entertainment.

A common day-to-day question is whether input tax incurred on entertainment is claimable.  The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EU involvement, and case law. 

I have looked at this subject in more depth here and this article also includes a helpful flowchart. 

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

By   2 June 2026
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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.

A VAT Did you know?

By   27 May 2026
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Salted nuts are standard rated, but packets of nuts which are still in their shells are VAT free.

VAT Success Stories

By   26 May 2026
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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   29 April 2026
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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   29 April 2026
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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.