Category Archives: SME

VAT: Types of legal entities

By   10 April 2025
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VAT Basics

What types of entities can be a ‘taxable person’?

The definition of a taxable person in the VAT Directive is any person or body “who, independently, carries out in any place any economic activity, whatever the purpose or results”. Economic activity in the UK broadly means any business activity. I consider this definition below. 

So, what is a person or body?

 In practice, a taxable person or body is generally a business, sole trader or professional. Examples of types of legal entities are a:

  • Sole proprietor
  • Partnership
  • Limited Liability Partnership (LLP)
  • Limited company (limited by shares)
  • Private company (limited by guarantee)
  • Public Limited Company (PLC) – a company registered under the Companies Act (1980)
  • Community Interest Company (CIC)
  • Charitable Incorporated Organisation (CIO)
  • Private unlimited company
  • Club or Association
  • Unincorporated Association
  • Co-operative Society (Co-Op)
  • Community Benefit Society (BenCom)
  • Trust
  • Charity
  • Not For Profit (NPF) entity
  • Right To Manage company (RTM)
  • Financial Mutual
  • Societas Europaea (SE)
  • Co-operative or community benefit society
  • “Section 33” body, eg; Local Authorities, Fire and Rescue Authorities, Police, Lighthouses, the BBC etc – VAT Act 1995 s33. These bodies have different VAT rules, and they may not necessarily be a taxable person

Each type of entity or structure is subject to separate rules; from; governance, direct tax, reporting, accounting, risks, costs, benefits, responsibilities to legal rights and obligations etc. However, from a VAT perspective, the VAT legislation applies equally to all taxable persons.

Two or more corporate bodies may apply to register as a single taxable person (VAT group) if they can meet certain conditions.

A corporate body can apply to register each division separately if it:

  • is organised in divisions
  • carries on its business in divisions
  • can meet certain conditions

What are not taxable persons?

Private individuals are not generally involved in business and will therefore not be classed as taxable persons.

What is business?

There is considerable case law on what constitutes ‘business’ for VAT purposes. I have written about this issue many times, as it is a fundamental issue in the tax.

The following articles consider such case law:

Wakefield College
Longbridge
Babylon Farm
A Shoot
Y4 Express
Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft
Healthwatch Hampshire CIC 
Pertempts Limited
Northumbria Healthcare

Registration

A guide to VAT registration here.

VAT: EORI – What is it? Do I need one?

By   10 April 2025
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VAT Basics
HMRC has published new  guidance on Economic Operator Registration and Identification (EORI) numbers. Although most of the guidance is not new, it is a reminder of what EORI numbers are and who needs them.
What is an EORI?

EORI is an acronym for Economic Operator Registration & Identification.

An EORI number is assigned to importers and exporters by HMRC (EOs) and is used in the process of customs entry declarations and customs clearance for both import and export shipments moving to or from the UK.

What is the EORI number for?

An EORI number is stored both nationally and on a central EU EORI database. The information it provides is used by customs authorities to exchange information, and to share information with government departments and agencies. It is used for statistical and security purposes.

A business may need to demonstrate to HMRC that it has carried out proper due diligence in certain cases.

Who needs an EORI number?

You will require an EORI number if you are planning to import or export goods. EOs can be sole proprietors, partnerships, UK incorporated companies, registered charities, and overseas companies. However, private individuals bringing their own possessions to or from the UK do not need an EORI number. An EO does not need to be VAT registered to have an EORI number.

For VAT groups, each member who imports or exports goods needs an EORI number.

Format of the EORI number

VAT registered companies will see the EORI as an extension of their VAT number. Your VAT nine digit VAT number will be prefixed with “GB” and suffixed with “000”.

How do I apply for an EORI Number?

Non VAT registered companies can apply using this link – FORM C220

VAT registered companies can apply using this link – FORM C220A

Once completed, your form should be emailed to:  eori@hmrc.gsi.gov.uk

How long will my EORI application take?

The process is straightforward and EORI applications usually take up to three working days to process.

Please contact us if you have any issues with importing or exporting.

EORI checker

Gov.uk has provided a new tool to check a business’ EORI number. (This used to be an EU resource now not available due to Brexit).

Access

Who has access to an EORI number?

The general public can access limited data, When a business is notified of its EORI number, it will be asked whether it objects to this data being published on the site.

VAT: Construction Services Reverse Charge – New HMRC Manual

By   8 April 2025
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The Construction Reverse Charge (RC) background details here.

HMRC has recently published its VAT Reverse Charge for Building and Construction Services Manual.

It includes:

  • how it works
  • which services are covered
  • the supplies of materials
  • the supplies of labour and/or staff
  • who needs to apply it
  • practical issues such as invoicing and adjustments to consideration
  • compliance issues

The contents of the new manual are:

HMRC actions to counter tax avoidance

By   1 April 2025
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In the Spring Statement 2025 HMG announced a package of measures that will affect VAT and other taxes. The aim is to close the tax gap and raise over £1 billion in additional gross tax revenue per year by 2029‑30.

Anti-fraud

HMRC is expanding its counter-fraud capability to increase the number of annual charging decisions for the most harmful fraud by 20%. Additional criminal investigations is intended to deliver a strong deterrent. This will include tackling those who undermine legitimate trade and small business, fraud committed by the wealthy, fraud facilitated by those in large corporations, and by individuals and companies who make it possible for others to hide money offshore.

Snitching

There will be a new HMRC reward scheme for informants will be launched later this year. This will target serious non-compliance in large corporates, wealthy individuals, offshore and avoidance schemes. The new scheme will reward informants with compensation linked to a percentage of any tax taken as a result of their actions.

“Phoenixism”

HMRC, Companies House, and the Insolvency Service will deliver a joint plan to tackle those who use contrived insolvencies to evade tax and write off debts owed to others. This will include increasing the use of upfront payment demands, making more directors personally liable for company taxes, and increasing the number of enforcement sanctions.

Compliance

HMG will invest £87 million over the next five years in HMRC’s existing partnerships with private sector debt collection agencies to collect more unpaid tax debts. It will also invest £114 million over the next five years to recruit an additional 600 HMRC debt management staff. In addition, the Government will invest £100 million over the next five years to recruit an additional 500 HMRC compliance staff.

The government also published four consultations on:

  • How HMRC can make better use of third‑party data to increase automation and close the tax gap.
  • Proposals to strengthen HMRC’s ability to take action against those tax advisers who facilitate non‑compliance from their clients.
  • A comprehensive package of measures to close in on promoters of marketed tax avoidance, whose contrived schemes leave their clients with unexpected tax bills.
  • Options to simplify and strengthen HMRC’s inaccuracy and failure to notify penalties.

A VAT Did you know?

By   26 March 2025
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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.

VAT treatment of lost, stolen, damaged or destroyed goods

By   24 March 2025
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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: Are hair transplants ‘medical care’? – The Advanced Hair Technology Ltd case

By   12 March 2025
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Latest from the courts

In the Advanced Hair Technology Ltd First-Tier Tribunal (FTT) case the issue was whether hair transplants are exempt supplies of medical care, or were they for ‘cosmetic’ purposes and consequently standard rated?

Background

Advanced Hair Technology Ltd (AHT) was a  medical practice trading as The Farjo Hair Institute which specialised in hair restoration surgery. It treated conditions related to hair loss, in particular androgenetic alopecia (AGA). Dr Farjo who carried out the work is qualified is a medical practitioner with the Royal College of Surgeons. The output tax which HMRC deemed due was circa £2,500,000.

The sole issue was what AHT provided covered by the definition ‘medical care’?

Legislation

The VAT Act 1994, Schedule 9, Group 7, item 1 covers services which are for the primary purpose of protecting, restoring, or maintaining health: “medical care”.                                                                 

Contentions

AHT argued that it was treating patients for medical conditions, as opposed to providing aesthetic surgery and consequently, its supplies were exempt. The appellant explained that several patients believed that hair loss had affected their self-confidence and so the surgery improved their overall health (which includes a mental health element). Furthermore, the surgery helps to protect the skin from future photodamage, minor trauma and thermal insult.

HMRC contended that none of the patients had any recorded prior psychiatric conditions, eg; depression or anxiety, nor had any stated that they were looking to benefit from the surgery beyond it improving their appearance and confidence. Additionally,  no recipients of the treatment said that they were seeking any of the above physical protections.

Therefore, the treatment was a standard rated cosmetic procedure.

Decision

The meaning of ‘medical care’ was considered by the Court of Appeal in its decision in Mercy Global [2023] EWCA Civ 1073.

The court agreed with HMRC that a “principal purpose” test must be applied in all cases.

The evidence before the FTT was that by the age of 70 at least 80% of caucasian men suffer from hair loss as a result of AGA, and this is part of the normal process of aging. AGA is not considered a medical condition but rather a symptom.

AHT’s contention that the procedures serve a therapeutic purpose related to psychological issues was dismissed due to a lack of evidence from qualified practitioners. This reinforced the FTT’s view that the treatments were primarily cosmetic, rather than for medical reasons because altering one’s physical appearance was for aesthetic purposes.

The relevant supplies were therefore outside the exemption.

The appeal was dismissed.

Commentary

The judgment provides some guidance on the interpretation of the definition of medical care for the purposes of the exemption and follows similar recent cases which we covered here:

Skin Science

Skin Rich

X

The concept of the “provision of medical care” does not include medical interventions carried out for a purpose other than that of diagnosing, treating and in so far as possible, curing diseases or health disorders and it is the purpose of the medical intervention rather than merely the qualifications of the person providing it that is key in determining the VAT liability.

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of a certain club…

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts .

Interestingly, the judge here stated that the medical exemption may apply to some patients whose hair loss was a result of trauma caused by cancer treatment.

VAT Returns: A box-by-box guide

By   10 March 2025
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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 Domestic Reverse Charge procedure Notice updated

By   4 March 2025
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The Notice sets out how the Domestic Reverse Charge (DRC) makes supplies of standard or reduced rated construction services between construction or building businesses subject to the charge. This means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The DRC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user).

 

The supplies to which the DRC applies are set out here

The update includes information on recipients of DRC supplies that are not VAT registered. Broadly; if a business buys specified goods or services, it may make it liable to VAT registered on the strength of the value of the DRC. 

A VAT Did you know?

By   26 February 2025
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Under one VAT scheme, zero-rated and exempt supplies are subject to VAT – as are those which are “Outside the scope of UK VAT”.

Which, or course, makes entire sense.