Deadline for notifying an option to tax (VAT) land and buildings

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

HMRC had temporarily changed the time limit from 30 to 90 days for notifying an option to tax land and buildings during coronavirus. This extension applied to decisions made between 15 February 2020 and 31 July 2021. This extension has now ended.

HMRC has also confirmed that the temporary change, introduced as a result of the pandemic, to allow options to tax to be signed electronically has now been made permanent. HMRC requires evidence that the signature is from a person authorised to make the option on behalf of the business.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

However, any subsequent sale or rental of the property will attract VAT. Where the purchaser or tenant is able to recover the VAT charged this is not normally an issue. However, where the purchaser / tenant is not VAT registered or not fully taxable (such as bank) the VAT can become an additional (non-recoverable) cost. Once an option to tax has been made it can only be revoked under limited circumstances.

Scope and legal basis of VAT

The scope and legal basis of how VAT is charged on taxable supplies is defined as follows in the VAT Act 1994:

VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

There are four conditions that must be satisfied in order for an activity to be within the scope of UK VAT. These conditions are that the activity:

  1. Is a supply of goods or services
  2. That the supply takes place in the UK
  3. Is made by a taxable person
  4. Is made in the course or furtherance of any business carried on or to be carried on by that person

The fourth point above is a condition that needs to be carefully considered when deciding whether an activity is within the scope of VAT. This concept of 'business' is one of the less well-known rules and care must be taken to ensure that VAT is correctly charged.

Recovering VAT on car purchases

There are complex VAT rules that determine how you can recover VAT on car purchases. The usual fallback rule is that if you purchase a car for your business then no VAT can be reclaimed. 

The main exception to this rule is if the new car is used solely for business use. To qualify for VAT recovery the car must not be available for any private use and you must be able to demonstrate this. This means that the car should only be available to staff during working hours and should never be used for personal journeys.

It is also possible to claim back the VAT on a new car that is purchased for a business-related activity such as for use as a taxi, self-drive hire car or a car for driving instruction.

If your business leases a car for business purposes, then you can normally reclaim 50% of the VAT paid. Also, 100% of the VAT can be reclaimed if the car is used exclusively for a qualifying business purpose, such as a taxi or a car for driving instruction.

The rules are generally more straight forward for the purchase of commercial vehicles such as a van, lorry or tractor that are used only for business. Input paid on these purchases would normally be fully recoverable.

The VAT incurred on the purchase of motorcycles, motorhomes and motor caravans, vans with rear seats (combi vans) and car-derived vans can also be recovered if the vehicles are used solely for business use. 

VAT capital goods scheme overview

The VAT Capital Goods Scheme (CGS) is a means of adjusting the initial VAT recovery in respect of certain assets over either 5 or 10 years. The scheme seeks to agree a fair and reasonable attribution of VAT to taxable supplies and non-taxable supplies relating to the use of an asset over its lifetime.

The adjustment period for land and buildings is 10 years and for other CGS assets, 5 years. This adjustment period also considers any non-business use of the asset. The CGS is intended primarily for partly exempt businesses. However, businesses can change direction over the adjustment period and be subject to making CGS adjustments some years after an asset was purchased.

The CGS currently applies to:

  • Land and building (including extensions, alterations and refurbishments) with a cost (net of VAT) of £250k or more.
  • Computers, or computer equipment, with a cost (net of VAT) or £50k or more.
  • Ships and boats with a cost (net of VAT) of £50k or more.
  • Aircraft with a cost (net of VAT) of £50k or more.

Who can use VAT annual accounting scheme

The VAT annual accounting scheme is open to most businesses with a turnover of up to £1,350,000 per year.  The main benefits of the scheme include the requirement to file only one VAT return per year. This can significantly reduce the amount of administration time and the associated cost of preparing and submitting quarterly VAT returns.

Businesses can only apply to join the annual accounting scheme if they anticipate that their taxable supplies in the next 12 months will not exceed £1,350,000. The £1,350,000 figure excludes VAT but includes standard, reduced and zero rate VAT supplies.

Businesses can join the scheme either at the same time as applying for a new VAT registration or at any subsequent time. If the business has been registered for less than 12 months then an estimate can be used for future turnover.

In order to qualify to join the scheme, the business must be up to date with VAT payments, solvent and new to the scheme. In addition, the business cannot be a division of a company or a part of a group of companies.

Businesses that are in the scheme can continue using it until their taxable supplies exceed £1,600,000.

VAT inclusive and exclusive prices

When identifying the amount of VAT charged, it is important to distinguish between VAT inclusive and VAT exclusive prices. A VAT inclusive price includes VAT at the prevailing rate.

When a VAT registered business issues an invoice to their customer they must ensure that they charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions to consider. This includes the reduced VAT rate of 5%. 

A VAT exclusive price is the price of goods or services before VAT is added. The use of VAT exclusive prices should only be used when the prices are aimed at buyers who can recover any VAT charged, for example ‘trade prices’ for businesses. Even when VAT exclusive prices are quoted it is important to ensure that there is a prominent statement indicating the amount or rate of VAT that will apply. 

In order to work out how much VAT is included in a VAT inclusive price you need to divide the price including VAT by 1 + VAT rate. For example, to work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2 and if VAT was charged at 5% then the total is divided by 1.05.

Likewise, if you want to calculate a VAT inclusive price, for a standard rated (20%) transaction, you would multiply the price excluding VAT by 1.2 and for a reduced rate (5%) price you would multiply the price by 1.05.

Taxis: what is liable to VAT

HMRC sets out specific guidance regarding the application of VAT if you are in the taxi and private hire car trade. VAT Notice 700/25 – How VAT applies to taxis and private hire cars – applies.

Private hire cars include mini-cabs. The notice is relevant if you are:

  • a driver who owns or rents a vehicle (an owner driver)
  • the owner of a business which operates a number of vehicles
  • operating a taxi association

The fares a driver charges to their passengers for taxi or private hire journeys are liable to VAT at the standard rate. This also includes any additional charges for things like baggage and waiting time.

Other sources of income liable to VAT may include:

  • referral fees received from another taxi firm
  • charges for supplying fuel or the rental of vehicles and radios to drivers
  • administration charges to customers

Tips or gratuities voluntarily given by passengers are not regarded as payment for a supply and are outside the scope of VAT.

VAT – what you can and cannot reclaim

For most fully taxable businesses, VAT can be reclaimed on goods and services used in the business. This means that businesses must consider where there is personal or private use of goods or services bought for the business and can usually only reclaim the business proportion of the VAT.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use.

You cannot reclaim VAT for:

  • anything that is only for private use;
  • goods and services your business uses to make VAT-exempt supplies;
  • business entertainment costs;
  • goods sold to you under one of the VAT second-hand margin schemes;
  • business assets that are transferred to you as a going concern.

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their activities using a 'partial exemption method' to calculate how much input tax is recoverable.

New EU VAT Import One Stop Shop (IOSS) rules

There have been significant changes to the EU VAT rules for the sale of goods for businesses selling goods to consumers (B2C) located in the EU from 1 July 2021. The changes mean that EU VAT must be applied on all goods that are sold online in the EU regardless of price including those through online marketplaces such as Amazon or eBay.

Whilst the UK has officially left the EU, these changes will have effect on UK trade. They will affect those sending goods directly from Great Britain to consumers in Northern Ireland and the EU.

To help deal with these changes, the EU has introduced a new online Import One Stop Shop (IOSS) to facilitate and simplify the declaration and payment of VAT for online B2C sales of goods imported in the EU with a value not exceeding £135 (€150).

If you only sell through a marketplace, they should have already registered for the IOSS. There is also no longer a de-minimis limit as the old rules that allowed items with a value of €22 or less (known as small consignment relief) to be imported into the EU have been removed. Goods with a value of more than £135 (€150) continue to require formal customs clearance as before.

There are also significant changes in relation to the movement of goods from Northern Ireland to the EU and imports of low value goods into the EU or Northern Ireland.

If you require any assistance in dealing with these changes, please let us know.

VAT – which supplies does reverse charge apply to

The VAT domestic reverse charge accounting mechanism was put in place to help prevent criminal attacks on the UK VAT system by means of sophisticated fraud.

The domestic reverse charge procedure applies to the supply and purchase of the certain specified goods and services.

The specified goods that the reverse charge applies to are:

  • mobile phones 
  • computer chips 
  • wholesale gas 
  • wholesale electricity 

The specified services are:

  • emission allowances 
  • wholesale telecommunications 
  • renewable energy certificates 
  • construction services 

Under the domestic reverse charge rules, it is the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on supplies of the specified goods or services. It should be noted that there are exceptions within each category, and it is important to check if the domestic reverse charge is required on a transaction or not. 

The domestic reverse charge should not be confused with reverse charge for cross-border services which applies to certain services from abroad.