Tag Archives: latest-vat-news

VAT treatment of lost, stolen, damaged or destroyed goods

By Marcus Ward 24 March 2025

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.

VAT: Insolvency update

By Marcus Ward 18 March 2025

HMRC has updated its Insolvency Practitioner Bulletin.

It sets out changes that have been made to form VAT 7 to help insolvency practitioners provide important information and provides explanations of questions on the form.

HMRC has changed the way it issues VAT repayments to insolvency practitioners from Monday 10 March 2025.

An update of the VAT 7 form includes a section to input bank details. It is important to ensure that the most recent version of the VAT 7 is used. This may be found at section 6.2 on Insolvency VAT Notice 700/56.

VAT: Are hair transplants ‘medical care’? – The Advanced Hair Technology Ltd case

By Marcus Ward 12 March 2025

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

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 stats released

By Marcus Ward 10 March 2025

HMRC has released its annual VAT statistics from 2023 to 2024.

The headlines are:

total VAT receipts in the financial year 2023 to 2024 increased by 6% to £169 billion compared to £160 billion in 2022 to 2023
the VAT population in 2023 to 2024 was 2,178,950, with 238,176 new registrations and 273,768 de-registrations in-year
the total net VAT liability in 2023 to 2024 was £173 billion
the wholesale and retail sector was the largest contributor to net VAT liability (32%) with a total of £55 billion
businesses with an annual turnover of greater than £10 million paid 75% of total net VAT liability (£130 billion)

Overall, it isn’t really a riveting read…

VAT Domestic Reverse Charge procedure Notice updated

By Marcus Ward 4 March 2025

HMRC has updated – VAT Notice 735: Domestic reverse charge procedure

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 Marcus Ward 26 February 2025

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: Time to pay guidance updated

By Marcus Ward 18 February 2025

HMRC’s guidance: How to pay a debt to HMRC with a Time to Pay arrangement was updated on 17 February 2025. This covers businesses which owe a debt to the department.

The updates cover:

Information about when a payment plan can be set up without contacting HMRC has been added.
Section ‘How we work out debt repayments’ has been removed as the information is covered in the section
Information to work out what businesses can afford to pay has been updated in the section ‘How we work out what you can afford to pay’.

If a business owes VAT

It can set up a payment plan to spread the cost of its latest VAT bill online without calling HMRC if it:

has missed the deadline to pay a VAT bill
owes £100,000 or less
plan to pay its debt off within the next 12 months
has a debt for an accounting period that started in 2023 or later
does not have any other payment plans or debts with HMRC
has filed all your tax returns

More information here: set up a payment plan online.

How to contact HMRC to discuss a Time to Pay arrangement

If a business cannot pay its tax bill and needs assistance (ie; the online arrangements above are not applicable) we recommend that it should contact HMRC as soon as possible.

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

By Marcus Ward 17 February 2025

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: e-invoicing consultation published

By Marcus Ward 13 February 2025

HMRC and the Department for Business and Trade have published their UK e-invoicing consultation paper.

Background to this development here and here.

E-invoicing is the digital exchange of invoice information directly between buyers’ and suppliers’ financial systems, even if these systems are different. The outcome is an invoice which is automatically written into the buyer’s financial system without manual processing.

E-invoicing automates the exchange of invoices between buyers and suppliers. The government says that increased e-invoicing uptake may support economic growth, business productivity, improve business cashflow and reduce errors in tax returns. It has the potential to both support businesses and tax administration.

The consultation aims to understand how e-invoicing aligns with businesses and their customers. Responses from businesses of all sizes – whether they use e-invoicing or not – as well as interest groups, representative bodies, industry bodies and individuals are encouraged.

The purpose of the consultation is to seek input on how the government can support the increased adoption of e-invoicing. The main points are:

different models of e-invoicing
whether to take a mandated or voluntary approach to e-invoicing
what scope of mandate might be most appropriate in the UK and for businesses
whether e-invoicing should be complemented by real time digital reporting

This would be a significant change to VAT and all businesses should understand the impact.

More on VAT in the Digital Age (ViDA), including Real-time digital reporting here.

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.