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Tax – VAT

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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Option to tax – changes

Useful changes were made to the options to tax rules on 1 April:

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Lock-out agreement – VATable

Is money paid for a lock-out agreement VATable? Suppose you have a VAT-registered seller who exercises an option to tax over commercial property. He then enters into a lock-out agreement (ie a buyer pays him money, in return for an exclusivity period in being able to buy the property, with that money being put towards the purchase price if the buyer proceeds). In that situation you should give thought to the VAT implications. There are two possible arguments:

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VAT – 1 January 2010

The VAT rate goes back to 17.5% on 1 January 2010, but can 15% be charged after that date? If the goods or services are supplied before 1 January, then 15% can be charged, even if the invoice is delivered after 1 January.

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Lettings – service charges

Earlier this year, the ECJ held that the letting of flats and the cleaning of common parts are separate supplies (even if both are supplied by L). In the view of the ECJ, the cleaning services will not fall within the concept of ‘letting of property’, and, since those activities can be separated from each other, they cannot be regarded as a single transaction. Thus, they are separate operations – and the cleaning cannot be regarded as an exempt supply of letting.

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Place of supply – change

The general rule for cross-border business-to-business transactions is that the place of VAT supply is deemed to be where the supplier is. But, this is being reversed: from 1 January 2010, the general rule will be that the place of supply in a business-to-business context will be where the recipient is.

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Building services – business?

Normally the supply of residential house building, and the supply of building materials, will be zero-rated. But, there is an exception allowing the recovery of the VAT for a person who lawfully builds residential housing, provided they do not carry out those works in the course of business.

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Lettings – service charges

Many Ls will have to alter the VAT basis on which they invoice for cleaning, and other service charges.

The ECJ has held that the letting of flats, and the cleaning of common parts, are separate supplies (even when both are supplied by L). In its view, cleaning services do not fall within the concept of the ‘letting of property’ and, since those activities can be separated from each other, they cannot be regarded as a single transaction. In essence, therefore, they must be regarded as mutually divisible operations – so the cleaning cannot be regarded as an exempt supply of letting.

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