Category Archives: VAT- Output Tax

VAT: Zero rated “hot” food – a summary

By   23 September 2024
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Food – What’s hot and what’s not?
Generally, cold takeaway food and drink is zero-rated (as long as it is not of a type that is always standard-rated, such as crisps, sweets and some beverages including bottled water).
Via VAT Act 1994 Schedule 8, Group 1, the sale of certain food is zero rated. However, there is an exception for supplies in the course of catering. Anything coming within the definition of catering reverts to the general rule and is taxable at the standard rate. The definition of catering includes “any supply of hot food for consumption off those premises…” Note 3 (b).
Historically, there has been many disputes over what food is “hot”. A seemingly straightforward definition one would think, but this is VAT, and case law insists that that is often not the case. A good example is the Eat case.
It may be coincidence, but I have dealt with a number of issues around this recently, so I thought it may be helpful to look at the VAT treatment of different types of food.

Pasties, sausage rolls, pies or other pastries

  • If they are hot and straight from the oven: Although the pastry is hot, it is not being kept warm, so therefore there is no VAT
  • Left to cool to room temperature: The pasty is not being kept warm, so no VAT is chargeable.
  • Kept hot in a cabinet, on a hot plate or under a heat lamp: The pasty is being kept warm so VAT is due

Sandwiches

  • Cold food is zero-rated for tax purposes so no VAT.
  • Heated for a customer – standard rated per the Eat case.

Bread

  • Freshly baked, cooling or cold – the bread is not kept warm, even though it may be straight from the oven, so would be VAT free.

Rotisserie chicken

  • If hot from the spit; VAT on takeaway food intended to be served hot is VATable.
  • Kept hot in a cabinet, on a hot plate or under a heat lamp – As the food is kept hot and served hot, VAT is applicable.
  • Left to cool to room temperature – If the chicken is cooked then left to cool, such as in bags in a supermarket, it will be VAT free.

Takeaways

  • such as fish and chips: VAT remains on all takeaway food served hot.

Catering

  • All supplies of catering is subject to VAT regardless of what food and drink is being provided. This includes all restaurants and cafés: VAT applies if a supply of food and drink is made for consumption on the premises that it’s supplied in.

This is a general guide and, as case law shows, there will always be products on the “borderline”.

In summary, food that is hot can be treated as cold…

VAT: Zero-rating for residential caravans

By   16 September 2024
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HMRC have issued guidance in relation to The Value Added Tax (Caravans) Order 2024. This will come into force on 30 September 2024.

Since 2013 caravans that meet certain size criteria and are manufactured to meet BSI standard 3632 are considered to be residential caravans. Such residential caravans are the only caravans that qualify for zero rate VAT.

The BSI standard in place on 6 April 2013 was BS3632:2005. In 2015 when the BSI updated the standard, the updated reference to BS3632:2015 was added into the legislation. This standard was updated again in 2023, so the legislation needed to be updated in order to maintain the zero rate for residential caravans. The amended legislation provides for the continuation of the zero rate, which will also apply to caravans meeting any updated version of BS3632 published by the BSI in the future.

Legislation

The Statutory Instrument amends The VAT Act 1994, Schedule 8, Group 9, item 1, which applies zero-rating to caravans manufactured to any version of BS3632. The effect of this is to extend the zero-rate to caravans manufactured to the 2023 version of BS3632 and also to ensure that if the BSI updates BS3632 in future the zero rate is maintained.

It also makes a consequential amendment to item 1(b) of Group 9, to preserve the zero rate for second-hand caravans occupied before 6 April 2013.

Definition of a caravan

The term ‘caravan’ is not defined in the VAT legislation. In practice HMRC bases its interpretation on the definitions in the Caravan Sites and Control of Development Act 1960 and the Caravans Sites Act 1968.

A caravan is a structure that:

  • is designed or adapted for human habitation
  • when assembled, is physically capable of being moved from one place to another (whether by being towed or by being transported on a motor vehicle so designed or adapted)
  • is no more than:
    • 20 metres long (exclusive of any drawbar)
    • 6.8 metres wide
    • 3.05 metres high (measured internally from the floor at the lowest level to the ceiling at the highest level)

More information on the VAT liabilities if various caravans here.

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

By   3 September 2024
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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.

A VAT Did you know?

By   27 August 2024
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The Irish Supreme Court ruled that the bread sold by the restaurant chain Subway was too sweet to be classified as bread and that the high sugar content meant that it could not be zero rated.

VAT: Tax point of telecommunications – The Lycamobile case

By   7 August 2024
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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.

A VAT Did you know?

By   29 July 2024
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Toffee apples are zero-rated, however, any other fruit which is covered in sugar (or toffee) sold as confectionary is standard rated.

Inter-company charges: Do I add VAT?

By   18 July 2024
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This seemingly straightforward area can throw up lots of VAT issues and touches on a number of complex areas. If we look at inter-company charges (commonly called “management charges”) it is clear that such a charge can cover a lot of different circumstances.
Do I charge VAT on a management charge?

An easy yes or no question one would think, however, this being VAT, the answer is; it depends. Typically, management charges represent a charge by a holding company to its subsidiaries of; a share of overhead costs, the provision of actual management/advisory services or office facilities or similar (the list can obviously be quite extensive).

Consideration for a supply

The starting point is; is something (goods or services) supplied in return for the payment? If the answer is no, then no VAT will be due. However, this may impact on the ability to recover input tax in the hands of the entity making the charge. 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, and VAT is charged, HMRC may challenge the VAT treatment and any input recovery of the company making the payment.

Composite of separate supply?

This is a complex area of the tax and is perpetually the subject of a considerable amount of case law. This has been so since the early days of VAT and there appears no signs of disputes slowing down. I have written about such cases here here here here and here

“Usually” if a combination of goods or services are supplied it is considered as a single supply and is subject to the standard rate. However, case law insists that sometimes different supplies need to be divided and a different rate of VAT applied to each separate supply. This may be the case for instance, when an exempt supply of non-opted property (eg; a designated office with an exclusive right to occupy) is provided alongside standard rated advice.

Approach

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?

Can the VAT treatment of a supply change when recharged?

Simply put; yes. For example, if the holding company pays insurance (VAT free) and charges it on as part of a composite supply, then VAT will be added to an original non-VAT bearing cost. It may also occur when staff are employed (no VAT on salaries paid) but the staff are supplied to a subsidiary company and VAT is added (but see below).

Staff

The provision of staff is usually a standard rated supply. However, there are two points to consider. One is joint contracts of employment which I look at below, the other is the actual definition of the provision of staff. Care must be taken when analysing what is being provided. The question here is; are staff being provided, or; is the supply the services that those staff carry out? This is relevant, say, if the services the staff carry out are exempt. There are a number of tests here, but the main issue is; which entity directs and manages the staff?

Directors

There can be different rules for directors compared to staff.

If a holding company provides a subsidiary company with a director to serve as such, the normal rules relating to supplies of staff apply and VAT applies.

However, there are different rules for common directors. An individual may act as a director of a number of companies. There may be an arrangement where a holding company pays the director’s fees and then recover appropriate proportions from subsidiaries. In such circumstances, the individual’s services are supplied by the individual to the companies of which (s)he a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore, there is no supply between the companies and so no VAT is due on the share of money recovered from each subsidiary.

Accounting adjustments

Just because no “cash” changes hands, this does not mean there is no supply. Inter-company recharges may involve the netting off of supplies so that no cash settlement is made. However, consideration is passing in both directions, so, prima facie, supplies have been made. This applies when there are accounting adjustments in both parties’ accounts.

Inter-company loans

The making of any advance or the granting of any credit is exempt via The VAT Act 1994, Schedule 9, Group 5, item 2. This exemption covers most normal types of credit, eg; loans and overdrafts.

Planning

Planning may be required if;

  • the subsidiary cannot reclaim all VAT charged to it as input tax
  • there are cashflow/timing disadvantages
  • there are management or administrative complexities

Specific planning

VAT grouping

If commercially acceptable, the holding company and subsidiary companies may form a VAT group. By doing so any charges made between VAT group members are disregarded and no VAT is chargeable on them.

There are pros and cons in forming a VAT group and a brief overview is provided here

A specific development in case law does mean care must be taken when considering input tax recovery in holdco, details here

Joint contracts of employment

If members of staff are employed via joint contracts or employment no VAT is applicable to any charges made between the two (or more) employers. In addition, where each of a number of associated companies employs its own staff, but one company (the paymaster) pays salaries behalf of the others who then pay their share of the costs to the paymaster the recovery of monies paid out by the paymaster is VAT free as it is treated as a disbursement.

Disbursements

Looking at disbursements is a whole article in itself, and in fact there is a helpful one here

But, briefly, if a charge qualifies as a disbursement, then the costs is passed on “in the same state” so if it is VAT free, the onward charge is also VAT free, as opposed to perhaps changing the VAT liability as set out above. It is important to understand the differences between a disbursement and a recharge as a VAT saving may be obtained.

Overseas

The above considers management charges within the UK. There are different rules for making or receiving management charges to/from overseas businesses. These charges are usually, but not always, VAT free (an example is the renal of opted office space which is land related, so is always standard rated) and it is worth checking the VAT treatment before these are made/received. VAT free services received from overseas may be liable to the reverse charge.

Same legal entity

There is no supply if management charges are made between branches of the same legal entity.

Charities

There may be more planning for charities and NFP entities via cost-sharing arrangements, but this is outside the scope of this article.

Summary

As may be seen, the answer to a simple question may be complex and the answer dependent upon the precise facts of the case. It is unusual to have two scenarios that precisely mirror each other, so each structure needs to be reviewed individually. Inter-company management charges must be recognised, especially if the recipient is partly exempt. Please contact us if you have any queries or would like more information on any of the above.

VAT – Understanding land and property issues

By   8 July 2024
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Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. This is increased by the fact that these are often one-off transactions by a business, and in-house, in depth tax knowledge is sometimes absent. Such activities can result in large penalties and interest payments, plus unwanted attentions from VAT inspectors. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include;

  • whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
  • conversions of properties from commercial to residential use
  • whether to opt to tax (OTT) a commercial property
  • the recovery of VAT charged on a property purchase
  • supplies between landlord and tenants
  • the Capital Goods Scheme (CGS)
  • the anti-avoidance rules
  • mixed developments
  • apportionment of VAT rates
  • changes in number of dwellings in a building(s)
  • changes in intention of use of a building
  • sale of partially completed developments
  • partial exemption
  • charity use
  • non-business use
  • relevant residential use
  • the place of supply (POS) of services
  • holiday lets
  • serviced apartments
  • contracts
  • new build residential
  • DIY Housebuilders
  • tax points (time of supply)
  • HMRC queries
  • deposits
  • and even seemingly straightforward: VAT registration

Additionally, the VAT treatment of building services throws up its own set of VAT complications.

The above are just examples and the list is not exhaustive.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.

Don’t leave it to chance!

For more information, please see our Land & Property services

A VAT: Did you know?

By   25 June 2024
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In the current election the Liberal Democrats’ manifesto stated that they would apply zero-rating to children’s toothbrushes and toothpaste. Whether this impacts the money left by the tooth fairy remains to be seen…

VAT: What is an exempt supply, and what does it mean?

By   17 June 2024
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VAT Basics

Exemption generally

Some services are exempt from VAT. If all the services a business provides are exempt, it will not be able to register for VAT, which means it cannot reclaim any input tax incurred on its purchases or expenses.

If a business is VAT registered it may make both taxable and exempt supplies (it will need to make at least some taxable supplies to be registered). Such a business is classed as partly exempt and it may be able to recover some input tax, but usually not all (Please see de minimis below).

Types of supply which may be exempt

Examples are:

The above list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax.  This is known as the option to tax, and it is considered in more detail here.

The legislation covering exemption is found at The VAT Act 1994, Schedule 9. 

What does exemption mean?

 An entity only making exempt supplies cannot register for VAT and consequently has no VAT responsibilities or obligations. While this may seem attractive, exemption is often a burden rather than a relief. This is because any VAT it incurs on any expenditure is irrecoverable and represents an additional cost.  This often affects charities, although there are some limited reliefs.

Exempt supplies are completely different to non-business activities, although the VAT outcome is often similar.

 Partial exemption de-minimis

A partly exempt business cannot usually recover all of the input tax it incurs. However, there is a relief called de minimis. Broadly, if VAT bearing expenditure is below certain limits in may be recovered in full. These are provisional calculations and are subject to a Partial Exemption Annual Adjustment.

Further information on terms used in partial exemption here.