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Tax – VAT

'Compensation' - not a supply

A compensation payment will not be VATable (being regarded as damages or liquidated damages). Interestingly, it is possible for ongoing contractual payments to be regarded as 'compensation' (rather than contractual payments for the provision of services).

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New build - planning permission

Zero rating applies to the construction of new dwellings. In practice, it is vital to ensure that the planning consent is properly worded so as to ensure it is a new build - as opposed, for example, to a rebuild of an existing property. Otherwise, there will be arguments over whether it is a genuine new build (and clear evidence of the building being taken down to the foundations or slab will be needed).

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Break clause - penalty payment

Suppose a commercial T has a break clause which allows him to break the lease on payment of a penalty to L (eg three months rent). Will that penalty payment be subject to VAT (or will it be treated in the same way as the rent - and thus be VATable if it is a VAT-elected property)?

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Service charges - VATable?

Are service charges VATable?

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Disbursements - conveyancing

HMRC's view as to what is a disbursement for VAT purposes is different from that of the Law Society. In particular, HMRC puts strong emphasis on its requirement that (i) you must have acted as the agent of your client when you paid the third party, and
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Solicitors – disbursements

In 2008, HMRC argued that personal injury clients should pay VAT on the cost of medical reports obtained by their solicitors. This was against the established principle that the report fees were disbursements, with the solicitors acting as agents for their clients.

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Third-party costs – any benefit?

Recovery of VAT on third-party costs is a difficult and technical area of VAT. The basic principle set out in Redrow [1999] is that the person paying VAT must make business use of the service being supplied, in order to be able to recover the VAT. 


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Employees – bike schemes

Two recent developments have made ‘cycle to work’ schemes less attractive. 


Firstly, the ECJ has held that employers have to pay VAT on the benefit provided to the employees under salary sacrifice schemes (see our separate entry). As far as ‘cycle to work’ arrangements are concerned, those will generally involve the employer buying a bike for the employee to use to commute to work, funded by salary sacrifice.

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Employees – salary sacrifice

The ECJ has undermined the use of salary sacrifice schemes, by saying that VAT has to be paid on the value of vouchers provided to staff. 


Salary sacrifice schemes are based on employees sacrificing part of their salary so they no longer receive it as money, but instead are given benefits (eg childcare voucher, gym membership, car). Although the employee will be taxed on the value of the benefit, there will be no NI payable by the employee (or by the employer).

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Option to tax – revoking

The exercise of an option to tax (sometimes called the election to waive the exemption) has important consequences for the ability of a landowner to recover its input tax. If a landowner intends to make supplies of land or buildings that will be an exempt supply for VAT purposes (as will ordinarily be the case), it can exercise an option to tax. The effect of that option is to turn what would have been an exempt supply into a taxable, standard-rated, supply.

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