Category Archives: Technical

VAT: Input tax claims – alternative evidence

By Marcus Ward 12 February 2025

What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by legislation: VAT Regulations 1995/2518 Reg 29(2). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

What HMRC consider

HMRC staff are required to work through the following checklist:

Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
Does the business have evidence of payment?
Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
How did the business know the supplier existed?
How was the business relationship with the supplier established? For example: How was contact made?
Does the business know where the supplier operates from (have staff visited?)
How did the business contact them?
How does the business know the supplier can supply the goods or services?
If goods, how does the business know they are not stolen?
How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC is required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce Scandico Ltdv and Wasteaway Shropshire Limited.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT – Fuel and power guidance updated

By Marcus Ward 11 February 2025

HMRC has updated its notice Updated its Notice 701/19: Fuel and power.

The Notice explains how suppliers and users should treat supplies of fuel and power for VAT purposes and it sets out how to treat a number of other supplies connected with fuel and power.

The update provides more detail of supplies for domestic use.

Supplies of fuel and power for domestic use are eligible for the reduced rate of 5%.

The provider must be certain that the supply is to a dwelling or certain types of residential accommodation. Examples of allowed residential accommodation are:

armed forces residential accommodation
caravans
children’s homes
homes providing care for the elderly or disabled, people with a past or present dependence on alcohol or drugs or people with a past or present mental disorder
houseboats
houses, flats or other dwellings
hospices
institutions that are the sole or main residence of at least 90% of their residents
monasteries, nunneries and similar religious communities
school and university residential accommodation for students or pupils
self catering holiday accommodation

The following buildings are not considered residential accommodation for the purposes of fuel and power:

hospitals
prisons or similar establishments
hotels, inns or similar establishments

VAT penalties and surcharges – time limits for appeals. The Excel case

By Marcus Ward 10 February 2025

Latest from the courts

The recent Xcel Consult Limited First-Tier Tribunal (FTT) case serves as a reminder on the tight time limits for appealing against VAT penalties and surcharges.

The VAT Act 1994 Section 83G sets out a statutory time limit for bringing appeals in respect of VAT penalties and surcharges of the kind in question in this case. An appeal is to be made to the tribunal before the end of the period of 30 days beginning with the date of the document notifying the decision to which the appeal relates.

Section 83G(6) provides that an appeal may be made after the expiry of the statutory period if the Tribunal gives permission. In deciding whether to give permission to allow the late appeal, the three-stage test set out in Maitland is applied. These tests are:

(1) establish the length of the delay and whether it is serious and/or significant

(2) establish the reason or reasons why the delay occurred

(3) evaluate all the circumstances of the case, using a balancing exercise to assess the merits of the reason(s) given for the delay and the prejudice which would be caused to both parties by granting or refusing permission, and in doing so take into account “the particular importance of the need for litigation to be conducted efficiently and at proportionate cost, and for statutory time limits to be respected”.

Commentary

Our advice is to always respond within the 30 day limit, as relying on an out of time appeal can be risky. If that is not possible, an appeal should be submitted asap to ensure that test 1) above is not a reason to reject a submission.

HMRC late payment interest rates reduced

By Marcus Ward 10 February 2025

HMRC interest rates for late payments are to be revised following the Bank of England interest rate cut.

The Bank of England Monetary Policy Committee announced on 6 February 2025 to reduce the Bank of England base rate to 4.5% from 4.75%.

HMRC interest rates are linked to the Bank of England base rate. As a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will reduce.

These changes will come into effect on:

17 February 2025 for quarterly instalment payments
25 February 2025 for non-quarterly instalments payments

How HMRC interest rates are set

HMRC interest rates are set in legislation and are linked to the Bank of England base rate.

Late payment interest is currently set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit – or ‘minimum floor’ – of 0.5%.

The differential between late payment interest and repayment interest is in line with the policy of other tax authorities worldwide and compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.

A VAT Did you know?

By Marcus Ward 29 January 2025

Children’s clothing is zero rated. But where a child has one foot larger than the other, the pair of shoes can be zero-rated if the smaller shoe qualifies as a child’s size (boys 6 1/2 and girls; generally, size 3).

VAT: Supply of self-contained apartments covered by TOMS? The Sonder UT case

By Marcus Ward 21 January 2025

Latest from the courts

In the Upper Tribunal (UT) case of Sonder Europe Limited (Sonder) the issue was whether apartments leased to Sonder and used to provide short-term accommodation to corporate and leisure travellers were supplies of a designated travel service via the Tour Operators’ Margin Scheme (TOMS) and whether the bought-in supply was used for the direct benefit of travellers (as required by TOMS).

Background

Sonder leased apartments from landlords on a medium to long-term basis and used them to provide accommodation to travellers on a short-term basis (one night to a month; the average stay being five nights). Sonder furnished some apartments as well as undertaking occasional decorating and maintenance.

The sole issue was whether these supplies are covered by TOMS. TOMS is not optional.

Initially in the FTT it was decided that output tax was due via TOMS. This was an appeal by HMRC against that First Tier Tribunal (FTT) decision.

The issue

Whether VAT was accountable using TOMS – on the margin, or on the full amount received from travellers by Sonder.

Legislation

TOMS is authorised by the VAT Act 1994, section 53 and via SI 1987/1806.

Arguments

Sonder contended that the supply was “for the direct benefit of the traveller” as required by the VAT (Tour Operators) Order 1987 and that the accommodation was provided “…without material alteration or further processing”. Consequently, TOMS applied. The FTT decided that Sonder did not materially alter or process the apartments.

HMRC maintained that the FTT decision was based on the physical alternations made rather than the actual characteristics of the supplies. Consequently, these were not supplies covered by the 1987 Order and output tax was due on the total income received for these services.

Decision

The UT upheld HMRC’s appeal and decided that TOMS did not apply n these circumstances The UT found that the FTT’s decision was in error in that it did not have regard to whether the services bought in were supplied to it for the direct benefit of travellers. Furthermore, the short-term leases to occupy property as holiday accommodation were materially altered from interests in land for a period of years supplied by the landlords.

The services received by Sonder from the landlords were not for the direct benefit of the travellers and Sonder’s supplies were not for the benefit of the users without material alteration and further processing. Consequently, there was not a supply of bought-in services, but rather an ‘in-house’ supply which was not covered by TOMS.

To the UT, the position was even clearer in relation to unfurnished apartments. Sonder acquired an interest in land for a term of years in an unfurnished apartment. It furnished the apartment and then supplied a short-term licence to a traveller to occupy as holiday accommodation. What was supplied to the traveller was materially different to what was supplied to Sonder.

Commentary

Another illustration of the complexities of TOMS and the significant impact on a business of getting the rules wrong. The fact that the UT remade the decision demonstrates that different interpretations are possible on similar facts. Moreover, even slight differences in business models can result in different VAT outcomes.

VAT: Chatbots failure

By Marcus Ward 16 January 2025

Further to our article on HMRC using chatbots, reports have emerged that they are working less than 50% of the time and that the resolution rate is only 21% even once a connection is established.

It is clear that the attempt to move services online has caused significant issues for taxpayers and advisers.

A recent survey by the Association of Chartered Certified Accountants discovered that nearly 9 in 10 business owners (89%) said poor levels of service at HMRC is having a negative impact and causing a ‘huge roadblock’.

This is even more infuriating for people wishing to contact HMRC because the issue has been exacerbated by the restricted access to HMRC telephone helplines and the closure of the VAT registration helpline used by taxpayers and accountants.

VAT: Digital platform reporting

By Marcus Ward 14 January 2025

VAT and digital platforms

Via section 349 of the Finance (No.2) Act 2023, measures were introduced which require certain UK digital platforms to report information to HMRC about the income of sellers of goods and services on their platform. HMRC then exchange this information with the other participating tax authorities for the jurisdictions where the sellers are tax resident.

Under the Organisation for Economic Co-operation and Development (OECD) rules, digital platforms in participating jurisdictions will be required to provide a copy of the information to the taxpayer to help them comply with their tax obligations.

Now HMRC have recently (last month) issued a new series of guidance , or updated guidance, on digital platform reporting, which are:

Selling goods or services on a digital platform

This Guidance explains the details a business needs to give to digital platforms when selling goods or services in the UK. A section on what information sellers will receive from online platforms has been added.

It covers:

who is a seller
information which must be provided
reporting by platforms
information to be received
selling online and paying tax

Check if you need to carry out digital platform reporting

This guidance provides information on:

what qualifies as a digital platform
who should register
how to register
what needs to be reported
information required for reporting
carrying out due diligence
when to report
penalties

This sets out:

who should register
what you need to do
how to register
after you have registered

Managing digital platform reporting

This provides guidance on:

submitting reports to HMRC
ongoing account management
when to report
how to add or change a platform operator
how to add or change a reporting notification to tell HMRC if you are a reporting or excluded platform operator
how to add or change a reporting notification about the type of due diligence you choose
changing contact details
how to add team members
how to inform HMRC that another platform operator will report for you (assumed reporting)

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.

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