Wigs for teddy bears are subject to Customs Duty, but the Upper Tribunal ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free.
Tag Archives: vat-relief
VAT: Error corrections – two new updates and a helpful flowchart
VAT Notice 700/45 How to correct VAT errors and make adjustments or claims has been updated. The Notice sets out how to amend a business’ VAT records if errors have been made, how to correct errors on VAT returns, and how to claim a refund if VAT declarations have been overstated. The changes are:
- information on how and when to correct VAT errors
- what happens if corrections are not made
- information about claiming input tax
- more information about how underpayments and overpayments are paid
- HMRC’s response time after receiving an error correction
- clarification of the unjust enrichment rules
- the reimbursement scheme
- how HMRC repays interest owed on overpayments
Additionally, HMRC’s guidance: Check how to tell HMRC about VAT return errors has been updated.
This guidance explains the requirements for updating a VAT return, and how to make a correction online or tell HMRC in writing about errors. The update states that it is no longer possible to correct errors on VAT returns using form VAT652.
Basically, the guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service or adjusting a current VAT return.
Please see our flowchart on error reporting Error Reporting Flowchart
VAT & Import Duty
HMRC has updated its Guidance on How to claim a repayment of import duty and VAT if you have overpaid
It sets out how to check time limits and how to claim for importers, agents, freight forwarders or express operators. It also explains how to use the Customs Declaration Service or form C285 as an individual.
It covers:
- who can apply
- when to apply
- how to apply
- what you need — Customs Declaration Service
- apply online — Customs Declaration Service
- what you will need — C285 form
- apply online — C285 form
- what happens after the application
VAT: What is a TOGC? Why is it important?
Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions. It is always the seller who is responsible for applying the correct VAT treatment and will be required to support their decision.
Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.
The word ‘business’ has the meaning set out in The VAT Act 1994, section 94 and ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets.
TOGC Conditions
The conditions for VAT free treatment of a TOGC:
- The assets must be sold as a business, or part of a business, as a going concern
- The assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
- There must be no break in trading
- Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
- Where only part of a business is sold it must be capable of separate operation
- There must not be a series of immediately consecutive transfers
- Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply. This may be the date of completion or, if earlier, the date of receipt of payment or part payment (eg; a deposit). There are additional anti-avoidance requirements regarding the buyer’s option to tax
Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.
Property transfer
The sale of a property may qualify for TOGC if the above tests are met. Usually, but not exclusively, a TOGC sale is the sale of a tenanted building when the sale is with the benefit of the existing lease(s) – (the sale of a property rental business rather than of the property itself). Another example of a property TOGC is where a property under construction is sold (a development business). As may be seen, timing with a property TOGC is of utmost importance. For example, an option to tax one day late will invalidate TOGC treatment. A guide to land and property.
What purpose do the TOGC rules serve?
The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. The main purposes are to:
- relieve the buyer from the burden of funding VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole
- protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed by the new business but not paid by the selling business
What if it goes wrong?
TOGC treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control.
Add VAT when TOGC treatment applies:
Often, the TOGC point can be missed, especially in complex property transactions.
The addition of VAT is sometimes considered a “safe” VAT position. However, output tax will have been charged incorrectly, which means that when the buyer claims VAT shown on the relevant invoice, this will be disallowed. This can lead to;
- potential penalties and interest from HMRC
- the buyer having to recover the VAT payment (often the seller, having sold a business can be difficult to track down and then obtain payment from)
- significant cash flow issues (HMRC will need to be repaid the input tax claim immediately)
- if a property sale, SDLT is likely to be overpaid
Sale treated as a TOGC when it is a taxable supply:
When VAT free TOGC treatment is applied to a taxable supply (possibly as one, or more of the TOGC conditions are not met) then there is a tax underdeclaration. The seller will be assessed by HMRC and penalties and interest are likely to be levied. There is then the seller’s requirement to attempt to obtain the VAT payment from the buyer. Similarly to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide to make the payment.
Considering the usually high value of sales of businesses, the VAT cost of getting it wrong can be significant.
Summary
This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business is sold. Extensive case law (example here and changes to HMRC policy here) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view. I sometimes find that the buyer’s intentions change such that the TOGC initially applied becomes invalid when the change in the use of assets (from what was notified to the seller) actually takes place. HMRC is not always sympathetic in these situations. One of the questions I am often asked is: “How long does the buyer have to operate the business after purchase so that TOGC treatment applies?” Unsurprisingly, there is no set answer to this and HMRC do not set a specific period. My view, and it is just my view, is that an absolute minimum time is one VAT quarter.
Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.
I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. And yes, I know I would say that!
A VAT Did you know?
Sweetened rice cakes are zero-rated, but savoury flavoured ones are VATable.
BUT… The problem area is salted rice cakes. Lightly salted cakes are considered to require further preparation before consumption (and are therefore zero-rated) whereas more heavily salted rice cakes do not and are standard rated. However, there is no guideline as to where this borderline falls .
VAT: Holiday Lets – don’t get caught out
All residential letting is exempt… except holiday lets, which are standard rated at 20%. So, what is the difference? After all a house is a house, but the VAT treatment depends on how the property is advertised or “held out”.
If a property is held out for holiday accommodation, then the rental income is taxable.
What is holiday accommodation?
Holiday accommodation includes, but is not restricted to; any house, flat, chalet, villa, beach hut, tent, caravan or houseboat. Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. Also, increasingly, it is common for farms and estates to have cottages and converted barns within their grounds, which are exploited as furnished holiday lets so this use must be recognised for VAT purposes. Residential accommodation that just happens to be situated at a holiday resort is not necessarily holiday accommodation.
This treats holiday lets the same way as hotels, inns and B&B were VAT applies, which is fair.
Off-season lettings
If holiday accommodation is let during off-season, it should be treated as exempt from VAT provided it is let as residential accommodation for more than 28 days and holiday trade in the area is clearly seasonal.
What does this mean?
If the letting business exceeds the VAT registration threshold, currently £90,000, it must register for VAT. This usually means that either the business would lose a sixth of its income to HMRC or its letting fees would increase by 20% – which is not usually an option in a particularly price sensitive market. The only upside to registration is that VAT incurred on costs relating to the letting (input tax) would be recoverable. This may be on expenditure such as; agents’ fees, maintenance, refurbishments, laundry, websites and advertising etc.
Agents
If a property owner provides a property to a holiday letting agent and the agent itself provides the letting directly to the end users, this does not avoid the standard rating, even if the agent pays a guaranteed rent to the freeholder. This can catch some property owners out.
Sale of the property
When the owner sells the property, although it may have been used for standard rated purposes, the sale is usually treated as exempt. However, zero rating may be available for the first sale or long lease if it is a new dwelling with no occupancy restrictions. The sale of a “pure” holiday property is likely to be standard rated if it is less than three years old. To add to the complexity, it is also possible that the sale may qualify as a VAT free Transfer Of A Going Concern (TOGC). These are important distinctions because they determine, not only if VAT is chargeable, but, if the sale is exempt, there is usually a clawback of input tax previously claimed, potentially visa the Capital Goods Scheme (CGS).
Overseas properties
A final point: please do not forget overseas property lets. My article here sets out the tax risks.
Summary
There are a lot of VAT pitfalls for a business providing holiday lettings. But for a single site business, unless the property is large or very high end, it is likely that the income will below £90,000 and VAT can be ignored. However, it is important to monitor income and costs to establish whether:
- registration is required
- voluntary registration is beneficial (usually, but not exclusively, for major refurbishment projects).
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: Input tax incurred on the management of pension funds
HMRC has published Revenue and Customs Brief 4 (2025), which provides information about changes to VAT deduction on costs incurred in respect of the management of pension funds.
The Brief explains a further policy change to VAT deduction on the management of pension funds – Employers can now claim all the VAT on investment costs linked to pension funds. HMRC will no longer view investment costs as being subject to dual-use. Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rule
They no longer need to split the costs with pension trustees. This was (prior to the introduction of the changes on 18 June 2025) a dual-use apportionment.
This Brief is relevant to:
- businesses and other taxable entities that provide pension funds for their employees
- pension administration and asset management service providers
- pension fund trustees and pension providers
- tax advisers
Impact on partial exemption methods
Businesses may need to propose new partial exemption special method (PESM) to align their VAT recovery with the new policy.
Background
HMRC’s historic policy was that employers could recover input tax they incurred on costs relating to the administration of their occupational pension funds, but not those in relation to the asset management of investments made by the fund.
Subsequently, HMRC changed its policy to allow employers recovery of input tax incurred on investment costs, provided that the employer could show evidence that they contracted and paid for the investment services.
HMRC has said that it will publish additional guidance on the new policy by Autumn 2025.
Commentary
This is very welcome news for managers of pension funds. It provides clarity and simplification in accounting, plus, more significantly; a much-improved VAT position whereby irrecoverable input tax can be avoided.
The HMRC climbdown is originally a result of the Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) CJEU case which considered an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund..
VAT: Treatment of vouchers, gifts and discounts – How business promotions work
I hope that the VAT position is helpfully summarised here. I thought it may be useful if the VAT treatment of various business promotion schemes is set out in one place.
I recall a statement from an old mentor of mine; “if you have a marketing department you have a VAT issue!”
Summary
| Offer | How to charge VAT |
| Discounts | Charged on the discounted price (not the full price) |
| Gifts | Charged on the gift’s full value – there are some exceptions listed below |
| Multi-buys | Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods |
| Money-off coupons, vouchers etc | No VAT due if given away free at time of a purchase. If not, VAT due on the price charged |
| Face value vouchers that can be used for more than one type of good or service (multi-purpose) | No VAT due, if sold at or below their monetary value |
| Face value vouchers that can only be used for one type of good or service (single-purpose) | VAT due on the value of the voucher when issued |
| Redeemed face value vouchers | Charged on the full value of the transaction at the appropriate rate of the goods provided in return for the voucher |
Exceptions for gifts
There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.
Free goods and services
A business is not required to account for VAT on things like free samples if they meet certain conditions.
| Supplies | Condition to meet so no VAT due |
| Free samples | Used for marketing purposes and provided in a quantity that lets potential customers test the product |
| Free loans of business assets | The cost of hiring the asset is included in something else you sell to the customer |
| Free gifts | The total cost of all gifts to the same person is less than £50 in a 12 month period |
| Free services | You don’t get any payment or goods or services in return |
Background
Face value vouchers
Quite recent changes, radically alter the UK rules for face value vouchers (FVV). FVVs are; vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services.
Examples of FVVs would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.
Single or multi-purpose
The most important distinction for FFVs is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher then little has changed. If it is a single purpose voucher, however, HMRC will now required output tax to be accounted for at the date it is issued.
Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.
For example:
- a voucher which entitles you to download an e-book from one seller will be a single purpose voucher. A voucher which entitles you to either books (zero rated) or an e-book download (standard rated) from the same seller will be multi-purpose
- a voucher which entitles you to £10 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and you can buy a take away with the voucher (or hot food) then it would be multi-purpose.
The above means that for single purpose vouchers VAT is due whether the voucher is actually redeemed or not; which seems an unfair result. There is no way to reduce output tax previously accounted for if the voucher is not used.
Please contact us if you, or your clients use this type of business promotion. of course, get it wrong, and there is likely to be a financial penalty…
VAT: Updated Notice – Local authorities and similar bodies
Notice 749 has been updated. This is guidance for Local authorities, government departments, non-departmental public bodies, NHS bodies, local government bodies, the police and the fire and rescue services.
It sets out:
- which activities of local authorities and similar bodies are business or non-business for VAT purposes
- the VAT registration requirements for local authorities
- when local authorities and certain similar bodies can reclaim VAT incurred on costs that relate to their non-business activities
The changes amend:
- Section ‘7.2 Insignificant proportion’ has been updated to remove a reference to VAT attributed and apportioned to exempt supplies.
- Section ‘7.5 What to do if you want to opt for a special section 33 VAT recovery method to recover the VAT incurred’ the deadline for using a special section 33 recovery method has been changed from 31 October to 30 September following the end of the financial year.
Section 33 bodies
“Section 33 bodies” per The VAT Act 1994, section 33)
These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!
We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.