Category Archives: Value Added Tax

The option to tax is a VAT election that allows businesses to treat supplies of most non-residential land and buildings as taxable rather than VAT exempt. Once an option to tax is made, supplies in relation to that property are generally subject to VAT at the standard rate.

One of the key advantages of opting to tax a property is that it can allow businesses to recover input VAT on related costs, such as the purchase, development and refurbishment of a property, subject to the normal VAT recovery rules.

The decision to opt to tax is normally binding for 20 years and can only be revoked in limited circumstances. It is therefore an important VAT election that should be considered carefully.

HMRC guidance highlights a number of points to consider where changes are made to a property after an option to tax has been exercised:

• Extensions: Where a building that has been opted is later extended, the option to tax will generally apply to the entire extended building.
• Linked buildings: Where two completed buildings are later connected (for example via a covered walkway or internal access), the original option does not automatically extend to the newly linked building if it was previously separate.
• Forming a complex: Where separate units are later combined into a single building or complex, an option to tax made on one part does not automatically apply to the remaining un-opted parts.

The VAT treatment will therefore depend on the physical and legal structure of the property at the time the option is made and any subsequent changes.

Proper advice should always be taken before opting to tax, as it can have long-term VAT implications for both income and capital transactions.

The VAT Cash Accounting Scheme can help businesses improve cash flow by allowing VAT to be accounted for when customers actually pay invoices, rather than when invoices are issued. This can be particularly beneficial for businesses that offer credit terms or experience delays in customer payments.

Under normal VAT accounting rules, VAT is payable to HMRC once an invoice has been raised, even if payment has not yet been received. Using cash accounting helps reduce the risk of businesses funding VAT liabilities from their own resources.

Businesses can normally join the scheme if their estimated VAT taxable turnover is no more than £1.35 million in the next 12 months. Once using the scheme, businesses may continue to do so until turnover exceeds £1.6 million.

However, the scheme is not available in certain situations, including when a business has outstanding VAT returns or payments, has committed a recent VAT offence or is already using the Flat Rate Scheme.

There is no formal approval process required to join. Eligible businesses can start using the scheme from the beginning of a VAT accounting period or from the date of VAT registration if newly registered.

Businesses may also leave the scheme voluntarily at the end of any VAT period and can rejoin later if the eligibility conditions continue to be met.

Businesses that lease cars often assume they can recover all of the VAT charged on car  leasing payments. In practice, the rules are more limited.

Where a business leases a qualifying car, HMRC normally only allows 50% of the VAT on the leasing charges to be reclaimed. The restriction is designed to reflect an element of private use, even where the vehicle is mainly used for business journeys.

The rules are different in certain cases. For example, full VAT recovery is generally available where the vehicle is used as a taxi or for driving instruction, as these are treated as wholly business activities. This would allow qualifying businesses to recover 100% of the VAT charged on the lease.

The 50% restriction can also apply to short-term vehicle hire, including temporary replacement cars. However, where a car is hired for no more than 10 days and is used entirely for business purposes, the VAT block does not usually apply.

These rules can easily be overlooked, particularly where businesses hire vehicles on an ad hoc basis or assume that some business use automatically means full VAT recovery. It is important to ensure that the correct amount of VAT is reclaimed on car leasing costs to avoid issues arising after the fact.

Changes announced in the Autumn Budget have removed the use of a niche VAT scheme known as the Tour Operators Margin Scheme (TOMS) for private hire vehicle operators from January 2026.

TOMS was originally designed for tour operators selling travel packages. However, some large ride-hailing firms had used it to reduce their VAT liability by charging VAT only on their commission, rather than on the full fare. Following ongoing legal uncertainty, the government legislated to exclude taxi and private hire journeys from the scheme.

The change was expected to level the playing field, particularly benefiting black cab drivers in London and smaller taxi firms from outside London where passengers contract directly with the driver.

In practice, the outcome has been more complex. Due to Transport for London licensing rules, most fares in London are now subject to VAT. Outside London, some ride-hailing platforms, including Uber, have restructured arrangements so they act as agents rather than suppliers. This change moves the VAT liability to the drivers. As most drivers earn below the VAT registration threshold of £90,000 this means that on rides outside of London VAT is often still not charged.

For businesses, these changes have important implications when reclaiming VAT. Input VAT can only be reclaimed where it is clearly shown on a valid VAT invoice or receipt. If VAT is not separately identified, no reclaim is permitted, although the expense may still be deductible for Corporation Tax purposes.

The VAT Flat Rate Scheme is designed to simplify the way a business accounts for VAT and, in doing so, reduce the administrative burden associated with VAT compliance. The scheme is available to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000.

The concept of a “limited cost trader” was introduced in April 2017 and can affect the effective VAT payable by businesses using the Flat Rate Scheme. Where a business is classified as a limited cost trader, a fixed rate of 16.5% applies. This is significantly higher than the typical standard flat rate percentages, which can be up to 14.5%.

A limited cost trader is defined as a business whose VAT inclusive expenditure on relevant goods is either:

• less than 2% of VAT inclusive turnover in a prescribed accounting period; or
• more than 2% of VAT inclusive turnover but less than £1,000 per annum (where the prescribed accounting period is one year; if shorter, the threshold is adjusted proportionately).

For some businesses the outcome of the test will be straightforward. Other businesses will need to carry out a simple calculation using existing records to determine whether they meet the limited cost trader definition. Where a business falls within the definition of a limited cost trader, the Flat Rate Scheme is often unlikely to be beneficial.