Category Archives: VAT- Output Tax

VAT treatment of lost, stolen, damaged or destroyed goods

By   24 March 2025
0

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
0

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
0

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
0
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
0

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.

VAT: When is a bar a bar? – The Anglia Ruskin Students’ Union case

By   17 February 2025
0

Latest from the courts

A student union tried to argue that a bar is not a bar. It did not go well.

In the case of The Anglia Ruskin Students’ Union the High Court considered the appellant’s application for judicial review of HMRC’s decision that “92” which was operated on the university’s campus was a bar.

The importance of this description of the venue was that if it was indeed a bar, the supplies from it would be standard rated. This is because the supplies of catering to students by eligible bodies, including universities”, are exempt from VAT, on the basis that the supplies are closely related to exempt supplies of education, however, the exemption does not cover food and drink sold in bars.

The union contended that ‘bar’ means a place that does not supply catering, or, alternatively, predominantly or mainly serves alcohol.

HMRC, predictably argued that a bar is “somewhere where one can buy and drink alcoholic and other drinks, as well as food”, and that 92 met that definition.

The court agreed with HMRC that the bar was indeed a bar and did not grant permission to appeal.

So, now we know, a bar is a bar, not a café… or anything else really.

Technical

* Student unions often provide catering alongside universities. Since March 2002, HMRC has operated a published concession extending the exemption granted to supplies of catering made by universities to student unions.

VAT – Fuel and power guidance updated

By   11 February 2025
0

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

A VAT Did you know?

By   29 January 2025
0

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   21 January 2025
0

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.

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

By   10 January 2025
0

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:

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