If you buy a flapjack* from a vending machine in the corridor at work it is VAT free. However, if you buy the same product from a machine in the staff canteen it will be standard rated.
* Of course, zero rating only applies to a “traditional” flapjack and not cereal or energy/sports nutrition bars…
HMRC internal guidance manual has been updated on 9 October 2024.
This is likely to affect; charities and similar bodies, NFP, clubs, associations, philanthropic organisations, galleries and museums, “hobby” activities, amongst other persons.
Business or Non-Business (N-B) is very important in VAT as it determines, inter alia, whether a supplier is
The definition of business and N-B here.
Legislation: The I Act 1994 Section 24(5).
Further reading
I have written about this issue many times, as it is a fundamental issue in the tax.
The following articles consider case law and other relevant business/N-B issues:
Lajvér Meliorációs Nonprofit Kft. And Lajvér Csapadékvízrendezési Nonprofit Kft
What the Guidance Manual covers:
This is the main reference material for HMRC inspectors and other employees, so it is very helpful for advisers to understand HMRC’s likely approach to a potential VAT issue.
HMRC has updated its guidance on VAT refunds for public bodies.
Certain public bodies (known as “Section 33 bodies” per The VAT Act 1994, section 33) such as; local authorities, fire and rescue authorities, police authorities and the BBC which carry on non-business activities are nevertheless entitled to input tax recovery despite the normal non-business rules. Similar rules apply to certain museums and galleries.
The method for doing this is not on VAT returns, but by submission of Form VAT126 (for entities not registered for VAT). This form has been updated so that it can be completed and submitted digitally for first claims.
VAT Notice 998 (VAT Refund Scheme for museums and galleries) and VAT Notice 749 (Local authorities and similar bodies) have also been updated to set out how to claim VAT refunds.
This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.
VAT Registration
The obligation to VAT register here and the pros and cons of voluntary registration here.
Sales
Between application and receiving a VAT number:
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the relevant invoices showing VAT.
Purchases
Purchases made before registration:
Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.
There are time limits for backdating claims for input tax incurred before registration. These are:
Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).
The only VAT return on which such input tax is recoverable is the first.
Tip
When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.
The limit for backdating EDR is four years.
Irrecoverable VAT
Input tax cannot be reclaimed on:
NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.
The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.
Specific circumstances
There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).
Included in the CGS are:
NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.
Pre-incorporation
A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.
A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.
Documentation
Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.
Legislation
The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.
Fruit pulp is zero-rated, but fruit juice is standard-rated.
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:
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:
The HMRC guidance for galleries and museums Notice 998 has been updated to reflect changes to the VAT (Refund of Tax to Museums and Galleries) (Amendment) Order 2024.
The Notice applies to those museums or galleries that offer free admission to the public and which are eligible for refunds of VAT under the museums and galleries VAT Refund Scheme. It can be used to find out which museums or galleries offering free admission are eligible for refunds under the scheme. The VAT Act 1994, section 33A, sets out how the scheme works, but generally:
Museums and galleries offering free access are not in business in relation to this activity (their supplies are “non-business“). They may, of course, have other activities that in their own right which are business activities, eg; catering, sales of books and gifts and exhibitions for which there is a charge.
Normally, it is not possible to recover the VAT incurred on goods and services purchased to support non-business activities. Thus, VAT incurred in connection with the free admission of the public is not normally recoverable and represents a cost to these organisations.
However, HMRC will reimburse this otherwise irrecoverable VAT. For this to be the case, the provisions of section 33A of the VAT Act 1994 must apply, and the museum or gallery must be named in an Order made by HM Treasury.
Blocked VAT claims – an overview
In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.
Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.
Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.
If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here
If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.
This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.
In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.
If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:
For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users
Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.
Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.
This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.
Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.
Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.
Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.
A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.
A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.
There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.
Although, ideally, a business puts aside the VAT it collects from its customers (output tax charged) to pay its monthly, quarterly, or annual VAT bill, cashflow management can be difficult, especially for small or seasonal businesses with limited cash reserves. There are some things a business can do to mitigate the impact of VAT and one of these is a VAT loan.
Failure to pay VAT on time can lead to penalties and interest which could add to a business’ financial woes.
A VAT loan is a product which provides a short-term financing option to pay VAT on time. The loan covers the VAT amount due during each payment period, which allows a business to spread the VAT cost over a longer time instead of paying it up front in one hit.
Furthermore, there is no need to use up an existing bank facility. A VAT Loan gives a business an alternate financial option to utilise.
How it works
A business can apply for a VAT loan from a bank or other lender. It is usually deemed to be a secured business loan so assets must be put up as security. Once approved, the lender will pay it directly to HMRC. Repayment periods are typically between three months and a year.
The whole process does not usually take long as it is designed to be more streamlined than a standard loan. The money is usually paid to HMRC within days. Evidence of turnover and good credit history will be required, along with usual proof of ID and bank statements etc. Sometimes additional arrangement charges are made along with the interest.
Eligibility
A business must:
VAT bridging loans
There are generally two types of VAT loan: a standard VAT loan and VAT bridging loans. VAT bridging loans differ in that they are specifically a short-term option to assist a business bridge its cashflow gap between making a VAT payment, eg; for a significant purchase, usually property, and recovering this amount from HMRC as a repayment, which can take months (depending when the purchase was made in a VAT quarter and how quickly HMRC make the refund).
Finding a lender
It is usually advisable to look for a lender who offers VAT loans specifically and compare interest rates, terms, fees etc.
A quick Google produces many VAT loan products to compare.
Downsides
As VAT loans are short term, the interest rates are often higher than other business loans. Additionally, the loan repayments and fees increase strains on a business’ financial commitments.
Toffee apples are zero-rated, however, any other fruit which is covered in sugar (or toffee) sold as confectionary is standard rated.