Category Archives: Contract

What is outside the scope of VAT, and what does it mean?

By Marcus Ward 10 January 2025

Put simply, income which is outside the scope (OSC) of VAT is UK VAT free. It means that either there has been no supply in respect of that income (non-business, or ‘NB’), or if there is, it has a place of supply (POS) which is outside the UK. Although VAT free, OSC is distinct from exempt or zero-rated supplies and has a different impact for the entity involved in NB activities.

So, here I consider the different types of OSC income and how it affects the VAT position of the recipient of such a payment.

Charity

Charities and NFP organisations often receive income from various sources and often receive NB income which is OSC. This income is often donations for which the donor does not receive anything (there is no consideration provided by the charity). An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether particular transactions are business or NB activities. This applies both when considering registration (if there is only NB activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. ‘Business’ has a wide meaning for VAT purposes – an activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business. A common area of complexity for charities when considering whether their activities are in the course of business is receipt of grant funding (please see below).

Grants

There is no ‘standard’ VAT treatment of grants. The VAT outcome depends on the precise facts of each specific agreement. The most important test is whether the grantor receives any consideration in return for the payment. It may be that the donor recognises the good work a body does and wishes to contribute (akin to a donation) which is OSC. Alternatively, the recipient of the grant may be obliged to provide something in return (a supply which is not OSC). A helpful way of looking at this is to consider, not what the recipient does with grant money, but what it does for it.

Inter-company charges

Charges between VAT group members are OSC. Moreover, charges between non-VAT-grouped companies may also be OSC. These are commonly called ‘management charges’ and the VAT treatment depends on a number of facts. It is often the case that a management charge is used as a mechanism for transferring “value” from one company to another. If it is done in an arbitrary manner with no written agreement in place, and nothing identifiable is provided the income is likely to be OSC. Otherwise, it is likely to be a taxable supply. What is important is not how a management charge is calculated, but what the supply actually is (if it is one). The calculation, whether based on a simple pro-rata amount between separate subsidiaries, or via a complex mechanism set out in a written agreement has no impact on the VAT treatment. As always in VAT, the basic question is: what is actually provided?

Place of supply not the UK

If the POS is outside the UK, then the resulting payment for that supply is OSC. The POS rules can be complex and care must be taken in identifying the correct country to declare output tax (this may include the use of the OSS). In some instances, the Reverse Charge is applied. Input tax incurred in relation these supplies is recoverable, subject to the normal rules, and this distinguishes this type of supply from some of the others discussed here.

Transfer Of a Going Concern (TOGC)

A TOGC is deemed to be neither a supply of goods nor services, so consequently, it is OSC. Input tax incurred in respect of the costs of making a TOGC are considered an overhead of the business for partial exemption purposes, so it is not automatically disallowed because it relates to a ‘non-supply’.

Supplies by a non-taxable person

Sales by a business person who is not liable to be VAT registered.

Insurance etc

A payment between persons, which is paid under a contract of indemnity, is OSC, because it does not represent consideration for a supply, eg; sums paid under an insurance policy.

Private transactions

These transactions between individuals or gifts received are OSC.

Statutory fees

These are OSC, an example of such fees are: the London congestion charge, MOT testing, some road tolls, and parking fines.

Input tax recovery

VAT incurred on costs directly relating to OSC activities is not input tax and cannot be recovered (there are no de minimis limits). This is separate to partial exemption and a business/NB calculation is required before a partial exemption calculation is carried out, so it is a two-tier exercise. It may be possible to combine these two calculations, but that is an article for another day.

HMRC has issued new guidance on the amount of input tax claimable when an element is attributable to NB activities. If an entity is involved in both business and NB activities, eg; a charity which provides free advice and also has a shop which sells donated goods, it is unable to recover all of the VAT it incurs. VAT attributable to NB activities is not input tax and cannot be reclaimed. Therefore, it is necessary to calculate the quantum of VAT attributable to business and NB activities. That VAT which cannot be directly attributed is called overhead VAT and must be apportioned between business and NB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. It is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc (similar to those methods available for partial exemption calculations). Any calculation must be fair and reasonable.

Overall

OSC income should not be recognised in the value box of VAT returns and it does not count towards the VAT registration limit. It is likely to negatively affect the recipient’s input tax recovery position. The distinction between business and non-business is crucial and will significantly impact on an entity’s overall VAT position.

Further reading

The following articles consider case law and other relevant business/NB issues:

Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC

Pertempts Limited

Northumbria Healthcare

VAT: Property – The Option To Tax Guide

By Marcus Ward 8 January 2025

VAT Bsics

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

New HMRC publications: VAT on cladding remediation work

By Marcus Ward 6 January 2025

In the aftermath of the horrific Grenfell fire, a lot of buildings require unsafe cladding to be replaced.

A new Brief clarifies HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. It sets out:

the reason VAT costs are incurred when carrying out remediation works to residential buildings with fire and safety defects
the circumstances in which the VAT incurred in providing remediation works can be recovered

Broadly, the distinction is whether the work qualifies as snagging. If it does, the VAT treatment follows the liability of the original building work – zero rated if the original construction was of a zero-rated new residential building, ie; they are supplied in the course of construction of a qualifying building.

If not snagging, the remedial work will be standard rated.

If the work is standard rated, it may be recoverable by the recipient in certain circumstances.

Snagging

HMRC’s definition of snagging is “the carrying out of remedial works to correct faulty workmanship or replace faulty materials”. Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:

found soon after the building is completed
still covered by the building contract

More details on snagging here.

Furthermore, HMRC has published Guidelines for Compliance GfC11. This guidance covers HMRC’s existing policy on the VAT treatment of remedial works and includes:

the definition of snagging
an explanation of when you can recover input tax
examples to help you work out the VAT treatment of remedial works
examples of documents and evidence you should keep
information about correcting a submitted return

HMRC state that its policy has not changed.

VAT: Zero-rated exports. The Procurement International case

By Marcus Ward 7 November 2024

Latest from the courts

In the First-Tier Tribunal (FTT) case of Procurement International Ltd (PIL) the issue was whether the movement of goods constituted a zero-rated export.

Background

Both parties essentially agreed the facts: The Appellant’s business is that of a reward recognition programme fulfiller. The Appellant had a catalogue of available products, and it maintained a stock of the most ordered items in its warehouse. PIL supplied these goods to customers who run reward recognition programmes on behalf of their customers who, in turn, want to reward to their customers and/or employees (reward recipients – RR). The reward programme operators (RPOs) provide a platform through which those entitled to receive rewards can such rewards. The RPO will then place orders PIL for the goods.

A shipper collected the goods from PIL in the UK and shipped them directly to the RR (wherever located). The shipper provided the services of delivery including relevant customs clearances etc. on behalf of the Appellant. PIL had zero-rated the supply of goods sent to RRs located overseas. All goods delivered to RRs outside the UK are delivered duty paid (DDP) or delivered at place (DAP). As may be seen by Incoterms the Appellant remained at risk in respect of the goods and liable for all carriage costs and is responsible for performing or contracting for the performance of all customs (export and import) obligations. The Appellant was responsible for all fees, duties, tariffs, and taxes. Accordingly, the Appellant is responsible for, and at risk until, the goods are delivered “by placing them at the disposal of the buyer at the agreed point, if any, or at the named place of destination or by procuring that the goods are so delivered”.

Contentions

HMRC argued that in situations where the RPO was UK VAT registered, the appellant was making a supply of goods to the RPO at a time when the goods were physically located in the UK, and consequently there was a standard-rated supply. It issued an assessment to recover the output tax considered to be underdeclared.

PIL contended that there was a supply of delivered goods which were zero-rated when the goods were removed to a location outside the UK. It was responsible (via contracts which were accepted to reflect the reality of the transactions) for arranging the transport of the goods.

Decision

The FTT held that there was a single composite supplies of delivered goods, and these were a zero-rated supply of exported goods by PIL. The supplies were not made on terms that the RPOs collected or arranged for collection of the goods to remove them from the UK. The Tribunal found that the RPOs took title to the goods at the time they were delivered to the RR, and not before such that it was PIL and not the RPOs who was the exporter. This meant that the RPOs would be regarded as making their supplies outside the UK and would be responsible for overseas VAT as the Place Of Supply (POS) would be in the country in which it took title to the goods (but that was not an issue in this case).

The appeal was allowed, and the assessment was withdrawn.

Legislation

Domestic legislation relevant here is The VAT Act 1994:

Section 6(2) which fixes the time of supply of goods involving removal as the time they are removed
Section 7 VATA sets out the basis on which the place of supply is determined. Section 7(2) states that: “if the supply of any goods does not involve their removal from or to the United Kingdom they shall be treated as supplied in the United Kingdom if they are in the United Kingdom and otherwise shall be treated as supplied outside the United Kingdom”.
Section 30(6) VATA provides that a supply of goods is zero-rated where such supply is made in the UK and HMRC are satisfied that the person supplying the goods has exported them
For completeness, VAT Regulations 1995, regulation 129 provides the framework for the zero-rating goods removed from the UK by and on behalf of the purchaser of the goods.

Some paragraphs of VAT Notice 703 have the force of law which applies here, namely the sections on:

direct and indirect exports
conditions which must be met in full for goods to be zero-rated as exports
definition of an exporter
the appointment of a freight forwarder or other party to manage the export transactions and declarations on behalf of the supplier of exporter.
the conditions and time limits for zero rating
a situation in which there are multiple transactions leading to one movement of goods

Commentary

The Incoterms set out in the relevant contracts were vital in demonstrating the responsibilities of the parties and consequently, who actually exported the goods. It is crucial when analysing the VAT treatment of transactions to recognise each party’s responsibilities, and importantly, when (and therefore where) the change in possession of the goods takes place.

VAT: Deductions from, and sacrifice of; salary

By Marcus Ward 4 November 2024

This has been a difficult area historically, but as a result of the CJEU Astra Zeneca case, there is more certainty, although it was not beneficial for businesses. We look at the distinction between deductions from salary and salary sacrifice below, along with the VAT treatment of specific examples.

Current position

Generally, if deductions are made from salary for goods or services provided by an employer to their employees, these are liable to VAT. The remuneration an employee forgoes is consideration for the taxable benefits provided and output VAT will be due from, and input VAT recoverable, by the employer. Please see below for some specific circumstances.

Historical position

Deduction from salary – where an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer. Output tax is due on the amount deducted from the employee’s salary and is input tax recoverable.
Salary sacrifice – for VAT purposes “salary sacrifice” describes an arrangement where an employee opts to receive optional benefits provided by the employer and forgoes part of their salary in return. Employees who choose to take a benefit have their employment contracts amended to reflect the new arrangements. No output tax was due as it was not deemed to be a taxable supply.

We have come across businesses who erroneously still apply the past rules – which changed on 1 January 2012.

Valuation

In most cases the value of the benefit for VAT purposes will be the same as the salary deducted or foregone. Where the true value is not reflected, for example where benefits are supplied below what it cost to acquire them, the value should be based on the cost to the employer.

Specific staff benefits

Cycle to work scheme

Under this scheme employers purchase bicycles and safety equipment and provide them to employees. Where this is under a salary sacrifice arrangement employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.

Childcare and childcare vouchers

Businesses that put arrangements in place whereby their employees forego part of their salary and allocate that salary to pay for childcare provided by a third party are not making a supply of childcare. Any related costs incurred by the business, such as payroll and administration, are general overheads of the business.

Face Value Vouchers

Where vouchers, such as those available from high street retailers, are provided under a salary sacrifice arrangement, input tax may be claimed and output tax is due on the consideration paid by the employee.

Food and catering provided by employers

Employers may provide their staff with free or subsidised meals, snacks, or drinks. Where employees pay for the meal the normal VAT treatment will apply. If employees make no payment, VAT is not due, provided the benefit is available to all staff. Where employees pay for meals under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are zero-rated. An employer may claim the input tax incurred on related purchases, subject to the normal rules.

Cars

Most businesses are prevented from recovering VAT in full on the purchase and leasing of company cars. The input tax block on cars, generally: 100% on purchases, and 50% on leasing, means that employers do not account for output tax when cars are made available to employees. Where an employer suffers no input tax restriction, output tax is due.

VAT Business/Non-Business HMRC Internal Manual updated

By Marcus Ward 14 October 2024

HMRC internal guidance manual has been updated on 9 October 2024.

This is likely to affect; charities and similar bodies, NFP, clubs, associations, philanthropic organisations, galleries and museums, “hobby” activities, amongst other persons.

Business or Non-Business (N-B) is very important in VAT as it determines, inter alia, whether a supplier is

liable to register
liable to account for output tax
able to recover (all, some, or no) input tax

The definition of business and N-B here.

Legislation: The I Act 1994 Section 24(5).

Further reading

I have written about this issue many times, as it is a fundamental issue in the tax.

The following articles consider case law and other relevant business/N-B issues:

Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC

Pertempts Limited

Northumbria Healthcare

What the Guidance Manual covers:

an overview of the meaning of business for VAT purposes
general principles
meaning of N-B
- the term ‘business activity’ (economic activity)
- the concept of ‘business’ for VAT purposes
- the meaning of business
- the purpose of activity
- N-B activities
- persons with both business and N-B activities
- outside the scope income
- N-B activities which result in payment
determination procedures to establish whether an activity is business N-B
the relevant UK law and caselaw (per above amongst other cases)
the general approach for inspectors on business/N-B
factors to consider when determining if an activity is business or not
the link between supplies and consideration
methods of apportionment of input tax and approval of apportionment methods
formal procedures and work systems
clubs and associations
specific issues
legal history
HMRC policy background

This is the main reference material for HMRC inspectors and other employees, so it is very helpful for advisers to understand HMRC’s likely approach to a potential VAT issue.

VAT: HMRC manual on supply and consideration updated

By Marcus Ward 9 September 2024

HMRC internal manual – VAT Supply and Consideration has been updated.

The manual provides guidance on determining the liability of the supply of goods or services effected for a consideration including:

basic principles and underlying law
identifying a supply
consideration
illegal supplies
goods or services
supplies of goods for both consideration and no consideration
supplies of services for both consideration and no consideration
definition of consideration
indicators of consideration
off-setting
compensation
payments which are not consideration
payments in specific sectors
settlement of disputes

The amendments are in respect of payments that are not consideration: Carbon offsetting which adds two new pages giving examples of outside the scope activities and commentary on other ecosystem services.

The VAT treatment of sightseeing passes. The Go City Limited case

By Marcus Ward 3 September 2024

Latest from the courts

In the First-Tier Tribunal (FTT) case of Go City Ltd the issue was the VAT treatment of passes (“sightseeing packages”) sold by the appellant. Should they be outside the scope of VAT as multi-purpose vouchers (MPVs) or whether “functioning as a ticket”? The difference being the time of supply (tax point).

The issues

The appellant sells passes which enables the buyer to enter London attractions and travel on certain types of transport. The passes were sold at a price lower than the usual admittance price at the attractions. HMRC originally accepted that the supplies were of “face value vouchers” (MPV – see below) via The VAT Act, Schedule 10A, and latterly Schedule 10B, but later changed its view. It raised assessments for the deemed underdeclarations.

Tax point

The difference in VAT treatment is, essentially:

Face value vouchers (FVV) that can be used for more than one type of good or service (multi-purpose – “MPV”) – No VAT due when sold (if sold at or below their monetary value).
FVVs that can only be used for one type of good or service (single-purpose) – VAT due on the value of the voucher when issued.

Moreover, the above means that for single purpose vouchers, VAT is due whether the voucher is actually redeemed or not – there is no way to reduce output tax previously accounted for if the voucher is not used. Whereas for MPVs VAT is only due when they are redeemed. More background on vouchers below.

Contentions

Go City Ltd argued that what was being sold was MPV and output tax was only due when the voucher was redeemed.

HMRC contended that the sale was of a “ticket” (effectively a single purpose voucher) and that output tax was due “up-front”.

Decision

The appeal allowed. The Tribunal concluded that he passes were MPVs and their sale was consequently outside the scope of VAT. No output tax was due at the time they were sold.

The passes were not only outside the scope of VAT because they are MPVs, but also because the supplies take place when the customer uses the pass, and not when it is purchased. The position is essentially the same as in Findmypast and MacDonald Resorts .

Furthermore, the FTT considered the validity of a number of the assessments HMRC issued. These were raised “to protect HMRC’s position” in respect of the alleged underdeclaration of output tax. The court ruled that these assessments were invalid because, at the time they were raised, HMRC did not have a view that the appellant’s returns were incorrect, as a final decision had yet to be made.

Commentary

The correct decision I feel. A long read, but well worth it for interested parties.

Technical background

Face value vouchers

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 require 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 purchase books (zero rated) or stationery (standard rated) from the same seller will be multi-purpose.
a voucher which entitles you to £100 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and the buyer can buy a zero-rated take-away with the voucher (and/or standard rated hot food) then it would likely to be multi-purpose.

What is a VAT Loan? – Business finance

By Marcus Ward 8 August 2024

Although, ideally, a business puts aside the VAT it collects from its customers (output tax charged) to pay its monthly, quarterly, or annual VAT bill, cashflow management can be difficult, especially for small or seasonal businesses with limited cash reserves. There are some things a business can do to mitigate the impact of VAT and one of these is a VAT loan.

Failure to pay VAT on time can lead to penalties and interest which could add to a business’ financial woes.

A VAT loan is a product which provides a short-term financing option to pay VAT on time. The loan covers the VAT amount due during each payment period, which allows a business to spread the VAT cost over a longer time instead of paying it up front in one hit.

Furthermore, there is no need to use up an existing bank facility. A VAT Loan gives a business an alternate financial option to utilise.

How it works

A business can apply for a VAT loan from a bank or other lender. It is usually deemed to be a secured business loan so assets must be put up as security. Once approved, the lender will pay it directly to HMRC. Repayment periods are typically between three months and a year.

The whole process does not usually take long as it is designed to be more streamlined than a standard loan. The money is usually paid to HMRC within days. Evidence of turnover and good credit history will be required, along with usual proof of ID and bank statements etc. Sometimes additional arrangement charges are made along with the interest.

Eligibility

A business must:

be VAT registered
have been trading for over 12 months
have a taxable turnover exceeding £90,000

VAT bridging loans

There are generally two types of VAT loan: a standard VAT loan and VAT bridging loans. VAT bridging loans differ in that they are specifically a short-term option to assist a business bridge its cashflow gap between making a VAT payment, eg; for a significant purchase, usually property, and recovering this amount from HMRC as a repayment, which can take months (depending when the purchase was made in a VAT quarter and how quickly HMRC make the refund).

Finding a lender

It is usually advisable to look for a lender who offers VAT loans specifically and compare interest rates, terms, fees etc.

A quick Google produces many VAT loan products to compare.

Downsides

As VAT loans are short term, the interest rates are often higher than other business loans. Additionally, the loan repayments and fees increase strains on a business’ financial commitments.

This is a brief overview on the mechanism and does not constitute financial advice. Businesses should seek their own financial counsel. Before signing any loan agreements, you should seek independent financial advice to better understand if a VAT loan you are considering is the right one for you.

VAT: Tax point of telecommunications – The Lycamobile case

By Marcus Ward 7 August 2024

Latest from the courts

In the Lycamobile UK Ltd First-Tier Tribunal (FTT) case, the issue was whether VAT was chargeable on the supply of a “Plan Bundle” at the time when it was sold and by reference to the whole of the consideration that was paid for it, or whether VAT was instead chargeable only when, and only to the extent that, the allowances in the Plan Bundle were actually used. The time of supply (tax point) was important because not only would it dictate when output tax was due, but more importantly here, if the appeal succeeded, there would be no supply of the element of the bundle which was not used, so no output tax would be due on it.

Background

The Plan Bundles comprised rights to future telecommunication services; telephone calls, text messages and data (together, “Allowances”). There were hundreds of different Plan Bundles sold by the Appellant and the precise composition of those Plan Bundles varied.

Contentions

Lycamobile considered that that the services contained within each Plan Bundle were supplied only as and when the Allowances were used, so that the consideration which was received for each Plan Bundle would be recognised for VAT purposes only to the extent that the Plan Bundle was actually used. In the alternative, these supplies could be considered as multi-purpose vouchers such that output tax was not due when they were issued, but when the service was used. Very briefly, the contention was that it was possible that not all of the use would be standard rated in the UK.

Unsurprisingly, HMRC argued that that those services were supplied when the relevant Plan Bundle was sold (up-front) and output tax was due on the amount paid, regardless of usage.

Decision

The Tribunal placed emphasis on “the legal and economic context” and “the purpose of the customers in paying their consideration”.

It decided that the terms of the Plan Bundle created a legal relationship between Lycamobile and the customer. The Bundle was itself the provision of telecommunication services when sold. The customers were aware that they were entitled to use their Allowances and could decide whether to, or not. As a consequence, consumption was aligned with payment and created a tax point at the time of that payment. There was a direct link between those services and the consideration paid by the customer.

The Tribunal also considered the vouchers point. There were significant changes to the rules for Face Value Vouchers on 1 January 2019 (the supplies spanned this date), but the FTT found that the Plan Bundles were not monetary entitlements for future services under either set of rules, so the tax point rules for vouchers did not apply here.

The appeal was dismissed and HMRC assessments totalling over £51 million were upheld.

Commentary

Not an unexpected result, but an illustration of the importance of; tax points, legal and economic realities, and what customers think they are paying for. All important aspects in analysing what is being provided, and when.