September 2026

Value Added Tax (VAT) risks in business acquisitions rarely appear as one obvious error. More often, they’re spread across customer contracts, property decisions, overseas registrations, supplier invoices and group accounting. Individually, each point may look manageable; together, they can alter the value and risk profile of a transaction.

For a buyer, an unidentified liability may lead to additional costs after completion or show that forecast margins are unreliable. For a seller, a late VAT discovery can trigger a price adjustment, a specific indemnity, wider warranties or delays while the parties work out the exposure.

Effective VAT due diligence therefore needs to test how the business makes VAT decisions, not simply whether figures were entered on a return. The review should follow the commercial activity from the first customer or supplier record through to invoicing, accounting, reporting and evidence.

Do not start with the VAT return

A return is the final output of many earlier decisions. It won’t, on its own, explain whether the correct VAT treatment was selected, whether a foreign registration was missed or whether purchase VAT was claimed by the right company.

A transaction-focused review starts by mapping the business: its revenue streams, customer types, operating territories, property interests, major costs and legal entities. Sample transactions can then be traced through contracts, invoices, accounting entries and VAT returns.

This is particularly important for consumer-facing organisations and businesses in financial services, insurance, health and education, where restricted recovery can turn VAT into a direct operating cost. The HMRC VAT guide (VAT Notice 700) provides the wider framework for VAT registration, accounting and payment.

Trace the VAT through revenue

The starting point is to understand what the business actually supplies. VAT exemptions are subject to detailed conditions and should be tested against the contracts and the service delivered in practice. If taxable income has been treated as exempt, VAT may have to be accounted for from the price already charged to the customer.

A useful revenue map separates the main categories rather than grouping all sales on which UK VAT was not charged. These categories may include:

• UK supplies charged at the standard, reduced or zero rate
• Exempt supplies that may restrict input VAT recovery
• Amounts that fall outside the scope of UK VAT
• Cross-border supplies whose treatment depends on the customer, location and nature of the supply
• Internal transactions that may be disregarded within a UK VAT group

An invoice without UK VAT isn’t evidence of an error by itself. The business must be able to explain the legal basis for the treatment and retain the proof it requires. Exported goods, for example, qualify for zero rating only when the relevant conditions are satisfied and the necessary export evidence is held within the permitted timeframe.

Test international obligations in the countries that matter

A UK establishment doesn’t confine a business’s VAT obligations to the UK. Cross-border sales can create registrations and recurring filings elsewhere, depending on the country, the supply, the customer’s VAT status and any threshold or simplification available.

The place-of-supply rules help determine which country has the right to tax a service. The rules can change according to the nature of the service and whether the customer is a business or consumer. Further detail is available in HMRC’s place of supply of services guidance (VAT Notice 741A).

Historic registration dates can extend back over several years. Where the customer is a consumer, it may no longer be commercially possible to collect the additional VAT, leaving the business to fund the tax, interest and any penalties itself.

VAT due diligence for acquisitions should therefore compare where customers and supplies are located with the registrations and filings shown in the data room.

Put property on its own workstream

Property can generate a material VAT exposure even when real estate isn’t the target’s main business. The analysis turns on several connected facts: the asset’s nature and age; any option-to-tax election; its current and intended use; each party’s position; and whether the transaction meets the conditions for a transfer of a going concern.

Because the underlying values are often significant, a single incorrect assumption can create a large liability or cash-flow requirement. Options to tax, supporting correspondence, lease terms and previous transactions should be reviewed as a connected evidence set rather than as isolated documents.

Follow the purchase invoices

VAT registration doesn’t make every purchase claim valid. Input VAT is generally recoverable only to the extent that the cost supports taxable or other qualifying activities. The usual conditions covering business use, attribution, blocked input tax and supporting evidence still apply.

Due diligence often reveals invoices addressed to the wrong group company, missing tax invoices, inconsistent coding or costs claimed without a clear link to the claimant’s activities. Those findings affect more than the value of the historic claim: they can indicate whether the wider VAT control environment is dependable.

Look for reverse charge costs that never appear on a supplier invoice

For certain services bought from a non-UK supplier, the UK customer may need to account for VAT under the reverse charge. A business that isn’t yet registered must also include relevant business-to-business (B2B) general-rule services when it tests whether the UK registration threshold has been crossed.

The reverse charge may be broadly neutral for a fully taxable business, but it can become a real cost where input VAT recovery is restricted. Software licences, cloud services, professional advice, online advertising and overseas group charges are common areas to test.

The contractual supplier and the establishment providing the service matter more than the brand name on the purchase order. VAT Notice 741A explains the place-of-supply and reverse-charge rules for services.

Challenge partial exemption before the buyer does

A partly exempt business must first attribute purchase VAT directly to activities that carry or don’t carry a right to deduct. Residual VAT then needs to be apportioned under the applicable method, with an annual adjustment where required.

Calculations can be missed or cease to reflect the business after an acquisition, restructuring, change in activity or change to a VAT group. A buyer will want to understand both the numerical exposure and whether the method still produces a fair and reasonable result for the way costs are actually used.

HMRC sets out the relevant calculations, methods and adjustments in its partial exemption guidance (VAT Notice 706).

Intercompany accounting can hide real supplies

Management charges, shared costs and other entries between separate legal entities can represent supplies for VAT purposes where the companies aren’t members of the same UK VAT group. Posting an amount only through intercompany accounts, or not raising a conventional invoice, doesn’t remove the need to consider VAT.

Connected-party rules also need attention. Where the prescribed conditions are met, HM Revenue & Customs (HMRC) can require open-market valuation, particularly when the customer has restricted recovery. The legislative basis for these valuation rules can be found in Schedule 6 of the Value Added Tax Act 1994.

HMRC may separately challenge a claim made by one entity for expenditure that, in substance, supports another. Agreements, allocation methods, VAT-group membership and the commercial purpose of each charge should all tell the same story.

Quantify historic exposure before deciding how to correct it

Businesses will usually need to look back four years when correcting VAT errors. HMRC can assess earlier periods in some circumstances, with a longer reach where behaviour was deliberate. Underdeclared tax can generate late-payment interest, while the penalty position will depend on what happened and the standard of care taken.

The supplier may owe interest even if its customer could have deducted the underlying VAT. Where the customer is unregistered or has limited recovery, the tax itself may also become an irrecoverable commercial cost.

The correct sequence is to confirm what occurred, calculate the affected amounts and periods, assemble the evidence and only then select the appropriate correction or disclosure route. VAT Notice 700/45 explains how VAT errors should be corrected and when they need to be separately notified to HMRC.

Build an evidence pack, not just an explanation

A technically reasonable answer can still be difficult to defend if the records are incomplete. Buyers commonly ask for the same evidence that HMRC would expect during an enquiry, including:

• Valid purchase invoices
• Contracts
• Customer-location evidence
• Proof of export
• Option-to-tax records
• Property analyses
• Partial exemption calculations
• Support for intercompany charges

Businesses must keep suitable VAT records and retain them for the required period. The detailed requirements are covered by HMRC’s record-keeping guidance (VAT Notice 700/21).

Sellers are usually in a stronger position when the analysis is completed before the data room opens. It allows them to explain an issue accurately, show how it has been quantified and demonstrate what corrective action is already under way.

A practical VAT due diligence checklist

For a focused pre-deal review, the transaction team should be able to answer:

• Do the main revenue streams have the correct VAT liability and supporting rationale?
• Do overseas customer and supply locations reconcile with VAT registrations and filings?
• Have property transactions, options to tax and transfer-of-business conditions been checked?
• Can purchase VAT claims be tied to the correct company, activity and evidence?
• Have overseas services and group allocations been tested for reverse charge VAT?
• Are partial exemption calculations, annual adjustments and methods complete and current?
• Do intercompany agreements, accounting entries and VAT-group treatment agree?
• Have historic errors been quantified and the correct correction or disclosure route identified?
• Is the supporting VAT evidence organised and ready for buyer or HMRC scrutiny?

The aim isn’t to produce the longest possible issues list. It’s to identify the VAT matters that can affect deal value, cash flow, contractual protection or the buyer’s post-completion plan, and to address them while there’s still time to act.

How The VAT Consultancy can help

The VAT Consultancy can provide buy-side or vendor reviews through our VAT Risk Management and Control team. We can test the issues most likely to affect a transaction, quantify historic exposure and help the business improve its processes and evidence.

Where a review identifies cross-border or property questions, our Ad hoc UK and Global Advisory and Land and Property specialists can support the detailed analysis. We can also help with corrections, disclosures to HMRC and the practical steps needed before or after completion.

Bringing VAT specialists into a purchase, sale or refinancing at an early stage gives the transaction team better visibility of the exposure and a wider choice of practical responses.

If you are interested in working with the VAT Connsultancy – Contact us today.

The hospitality sector is under pressure from rising costs, cautious consumer spending and strong competition from supermarkets and convenience retailers.

For restaurants, pubs and cafés, one of the least understood pressures is VAT.

Customers often compare the price of eating out with the cost of buying food from a supermarket, but the VAT treatment behind those prices can be very different. Many supermarket food items are zero-rated for VAT when sold for home consumption. Food served in a restaurant, pub or café is standard-rated when eaten on the premises.

That difference can affect pricing, margins and competitiveness.

For hospitality businesses, VAT is not simply a finance issue. It can influence how menus are priced, how promotions are structured, how tills are set up and how much margin is left after tax and operating costs.

Why VAT matters for hospitality businesses

VAT is charged at 20% on mostthingsin the UKbut not most food. Where food is served as part of catering, or consumed on restaurant, pub or café premises, the standard rate will apply– this is essentially because the zero rated food loses its identity for VAT and becomes standar rated catering services.

That means a £12 VATinclusive meal does not leave the business with £12 of income. One-sixth of that price is VAT, so £2 is due to HM Revenue & Customs before the business accounts for ingredients, staff costs, rent, utilities, insurance, card fees or other overheads.

For hospitality operators already managing rising employment costs, food inflation and energy bills, that VAT element can be significant.

The issue is especially important because many hospitality businesses are small, local and labourintensive. They may not have the pricing power of larger retailers or the ability to absorb tax costs over large sales volumes.By the same token, larger hospitality businesses also employ people and their ability to consider doing so is similarly impacted.

The supermarket comparison

The VAT rules create a distinction that many customers may not realise exists.

A supermarket can sell many cold food products for home consumption at the zero rate. A café sellingthe samefood for customers to eat on its premises will have to charge VAT at 20%.

That does not mean every supermarket food product is zero-rated. There are important exceptions, including confectionery, crisps, soft drinks, hot food and hot takeaway food. However, the broader point remains: many supermarket food purchases are treated differently from meals eaten in hospitality venues.

From a consumer perspective, the comparison is simple. They see the final price.

From a hospitality business perspective, the comparison is more complex. The business may be competing with supermarket food options while also having to build 20% VAT into the price of eat-in meals.

That creates a commercial challenge. If the business passes the VAT cost on to customers, prices may rise. If it absorbs the cost, margins fall.

How UK hospitality VAT compares with Europe

The VAT issue is not only about competition between hospitality businesses and supermarkets. It is also about how the UK compares with other European visitor destinations.

Many European countries apply reduced VAT rates to hotel accommodation, restaurants, cafés or catering services. The exact rules vary by country and by type of supply, and alcoholic drinks are often treated differently. However, the broad comparison is important.

In several major tourism markets, hospitality VAT rates have historically been lower than the UK’s 20% standard rate. For example, Spain, France and Italy have applied 10% VAT rates to restaurant and catering services, while Cyprus has applied 9%. Hotel accommodation has also benefited from reduced rates in many European countries.

This creates a further competitiveness issue for UK hospitality.

Restaurants, pubs, cafés and hotels in the UK are not only competing with supermarkets and consumer spending pressures at home. They are also part of the wider visitor economy, competing with European cities and holiday destinations for international tourists.

For tourists, VAT is rarely visible as a separate issue. Visitors usually judge the total cost of a trip. That includes accommodation, meals, attractions, transport and shopping. Where VAT increases the price of eating out or staying in the UK, it can affect how expensive the destination feels.

This is particularly important for cities such as London, Edinburgh, Manchester, Liverpool, Bath and York, as well as coastal and rural destinations that rely on visitor spending.

Tourism supports a broad supply chain. A visitor eating in a restaurant may also spend money on hotels, theatres, galleries, taxis, trains, shops and local attractions. If the UK becomes less competitive on price, the impact can spread beyond hospitality businesses alone.

The comparison with Europe does not mean the UK should simply copy another country’s VAT system. Each country has its own tax base, public finances and policy choices. However, it does show that a 20% VAT rate on many UK hospitality supplies is not inevitable.

For businesses in the sector, this adds another reason to monitor VAT carefully. The correct VAT treatment can affect pricing, margins and customer perception, particularly where businesses rely on tourist trade or operate in areas where visitors have a choice between the UK and other European destinations.

Why the temporary summer VAT cut does not solve the wider issue

The Government has introduced a temporary 5% VAT rate for certain children’s meals, children’s tickets and family attractions during the 2026 school summer holiday period.

The relief applies from 25 June 2026 to 1 September 2026 and covers specific supplies, including certain children’s meals provided by restaurants, cafés and similar catering establishments for consumption on the premises.

This is a welcome measure for businesses that can use it, particularly where family trade is important. However, it is limited in scope.

The reduced rate does not apply to all hospitality sales. It does not apply to adult meals. It does not apply to takeaway meals. It also does not apply simply because a meal is a smaller portion, a lowercalorie option or a discounted adult meal.

To qualify, a children’s meal must be held out for sale only as a children’s meal and supplied as part of catering services for consumption on the premises.

That means businesses need to review menus, till systems, pricing, staff training and VAT coding carefully before applying the reduced rate.

More fundamentally, the measure intended to help the consumer, not the hospitality business – it is short term and thiswill not alleviate the pressures created by the higher cost of employing staff or business rates – these remain in place.

The long-running campaign for lower hospitality VAT

The hospitality and tourism sector has campaigned for a lower VAT rate for many years.

The argument is that a reduced VAT rate could help businesses reduce prices, stimulate demand, protect jobs and support investment. Supporters also argue that hospitality is a high-employment sector with a strong connection to high streets, tourism, leisure and local communities.

During the Covid-19 pandemic, the Government introduced a temporary reduced VAT rate for hospitality, holiday accommodation and attractions. The rate was initially reduced to 5%, later moved to 12.5%, and returned to 20% from April 2022.

Since then, calls for a lower rate have continued, but successive governments have resisted a permanent reduction because of the cost to the Exchequer and uncertainty over how much of any VAT saving would be passed on to customers.

This creates a difficult policy balance. A broad VAT cut could be expensive, but the current rate also has consequences for pricing, jobs, investment and business viability.

Practical VAT issues for restaurants, pubs and cafés

Hospitality VAT is not always straightforward. Businesses should not assume that every sale is treated in the same way.

Areas that may need review include:

Eat-in and takeaway sales

Food eaten on the premises is standard-rated. Cold takeaway food may be treated differently, depending on the product and where it is consumed.

Hot takeaway food

Hot takeaway food and hot home deliveries are generally standard-rated.

Children’s meals

From 25 June 2026 to 1 September 2026, some children’s meals may qualify for the temporary 5% rate, but only where the conditions are met.

Vouchers and gift cards

The VAT treatment can depend on whether the voucher is single-purpose or multi-purpose, and when VAT becomes due.

Service charges and tips

Businesses should check the VAT and payroll treatment of service charges, discretionary payments and tips.

Deposits and cancellations

Deposits, no-show charges and cancellation fees can raise VAT questions, particularly for events, bookings and private dining.

Events and catering

Event catering, room hire, food, drink and entertainment may involve mixed supplies with different VAT considerations.

Input tax recovery

Businesses should check whether they are recovering VAT correctly on costs, particularly where they have both taxable and exempt income.

Why VAT reviews matter

A VAT review can help hospitality businesses identify both risk and opportunity.

If VAT is undercharged, HM Revenue & Customs may later assess the business for unpaid VAT, interest and penalties. If VAT is overcharged, the business may be pricing itself less competitively than necessary or reducing its own margin.

For businesses operating on tight margins, both outcomes matter.

A review should consider how sales are coded through the till, how menus are structured, how promotions are set up, how online ordering platforms treat VAT, and whether staff understand the difference between eat-in, takeaway, children’s meals and other sale types.

It is also important to keep evidence. VAT liability often depends on the facts, including how something is marketed, priced, packaged and supplied.

What hospitality businesses should do now

Hospitality operators should use the temporary summer relief as a prompt to check their wider VAT position.

Practical steps include:

• reviewing children’s menus before 25 June 2026;
• checking which items can and cannot use the temporary 5% rate;
• updating till and accounting systems;
• training staff on eligible and non-eligible sales;
• reviewing eat-in and takeaway VAT coding;
• checking vouchers, deposits and service charges;
• reviewing input tax recovery on costs;
• documenting the VAT treatment applied.

This is particularly important for businesses with multiple sites, changing menus, online ordering, delivery platforms or seasonal promotions.

Key takeaway

The VAT treatment of hospitality food sales remains a major commercial issue.

Restaurants, pubs and cafés are competing with supermarkets and at-home food options, but they do not always operate under the same VAT rules. Many supermarket food items are zero-rated, while food eaten in hospitality venues is standard-rated.

The temporary 5% VAT rate for certain children’s meals and family attractions is welcome, but it does not address the wider structural pressure on the sector.

For hospitality businesses, the practical message is clear: understand the VAT rules, check your systems and keep your VAT position under review.

VAT may not be the only pressure facing hospitality, but it is one that directly affects pricing, margins and cashflow.

For support with hospitality VAT, VAT liability reviews, VAT recovery or HMRC enquiries, contact Blick Rothenberg’s Indirect Tax team.

Prize draw VAT has moved firmly onto the compliance agenda for businesses selling entries to online draws and promotional competitions. HM Revenue & Customs (HMRC) is challenging the assumption that a free entry option automatically places paid ticket sales within the VAT exemption for betting, gaming and lotteries.

A Treasury answer published on 17 February 2026 confirmed HMRC’s view: where a prize draw has both paid and free entry routes, the paid entries are subject to VAT at 20%. Operators that have accounted for those sales as exempt may now need to revisit both their current position and earlier VAT periods.

The free-entry route answers a different question

Many prize draws offer a genuine free route alongside paid entry. That feature can be important under gambling legislation because a qualifying draw may operate without being licensed as a lottery. It does not, however, establish that the paid element qualifies for a VAT exemption.

HMRC considers paid participation in this type of draw to be a standard-rated supply. The ministerial answer relates specifically to arrangements with both paid and free entry, so businesses should still assess the facts of each product, including any skill-based competitions or separately charged services.

What is HMRC asking prize draw businesses to review?

We understand that HMRC has begun contacting prize draw and competition operators directly. Its campaign letters ask businesses to examine how they have categorised their income and whether previously submitted VAT returns require correction.

The issue is not limited to the next VAT return. If historic ticket sales were treated as exempt and HMRC maintains they should have been taxable, the business may face an assessment for earlier periods. The size of any liability will depend on the underlying transactions, the available records and the relevant time limits.

Why fixed consumer prices can turn VAT into a business cost

Prize draw tickets are generally sold to individuals for an advertised price. Where that amount must be treated as VAT-inclusive, the operator cannot simply add another 20% after the event and ask past customers to pay it.

At the standard rate, VAT accounts for one sixth of a VAT-inclusive receipt. For example, £120,000 of taxable ticket income would contain £20,000 of output VAT. Across several accounting periods, that extraction can materially affect cash flow, profitability and future pricing. Interest or penalties may also arise, depending on the circumstances.

Can operators recover VAT on prizes and other costs?

Changing the treatment from exempt to standard-rated can improve input VAT recovery. Where expenditure supports taxable ticket sales, the VAT on advertising, payment systems, website platforms, professional fees and qualifying prize purchases may be recoverable under the normal rules.

HMRC’s guidance also states that no additional output VAT is due when goods or services are awarded as prizes in a taxable competition. Cash prizes are outside the scope of VAT. The outcome still depends on the nature of the expenditure, the evidence held and any restrictions on recovery.

Recovering additional input tax can reduce the net exposure, but it may not compensate for output VAT that must be absorbed from historic consumer receipts.

A tribunal challenge may clarify the position

The VAT treatment of paid prize draw entries remains disputed. We understand that a major operator is taking its disagreement with HMRC to the First-tier Tribunal. A hearing is expected later in 2026, with a decision potentially following in spring 2027, although those timings could change.

Any judgment may influence how the wider sector approaches VAT on prize draws and competitions. Until then, operators should consider their own position and any HMRC correspondence rather than assuming that an anticipated tribunal case suspends existing compliance obligations.

Seven practical checks for prize draw operators

If your business runs paid prize draws or promotional competitions, start by working through the following questions:

• Which products provide paid entry, a free alternative or a genuine skill-based competition?
• What VAT treatment has been applied to each income stream, and why?
• How much VAT could be due when historic receipts are analysed as VAT-inclusive sales?
• Which purchase invoices support an additional input VAT claim?
• Do ticket terms, pricing models and financial forecasts need updating?
• Is an error correction or disclosure to HMRC appropriate, and could interest or penalties apply?
• What information is needed to respond to HMRC and protect your position while the tribunal case progresses?

Understanding both sides of the VAT calculation early can make the difference between a managed compliance exercise and an unexpected pressure on working capital.

Specialist VAT support for prize draws and competitions

The VAT Consultancy can review the liability of your entry fees, identify historical VAT exposure, test potential input tax claims and support your response to HMRC. Our VAT risk management specialists can also help you assess the commercial effect and strengthen your processes for future draws. To discuss your circumstances, contact The VAT Consultancy.

Sources

• UK Parliament: Treasury response on VAT and paid prize draw entries
• HMRC: VAT treatment of betting, gaming, lotteries and competition prizes
• HMRC: Correcting VAT errors and making adjustments or claims
• Gambling Commission: Requirements for free draws and prize competitions

Cladding remediation is not optional. Where unsafe cladding or fire safety defects have been identified, the priority is to make buildings safe and ensure residents are protected.

However, for developers, landlords, housing associations and other property owners, there is another issue that can quickly become significant: VAT.

In many cases, cladding remediation works are expensive, complex and already difficult to fund. If VAT is charged at 20% and cannot be recovered, the cost of the project can increase materially. That can affect budgets, cashflow, funding decisions and, in some cases, the timing of the works.

VAT should not be allowed to become a barrier to building safety.

Why VAT is an issue for cladding remediation

For many people outside the tax world, the VAT issue can seem surprising.

If a building needs remediation because of unsafe cladding or fire safety defects, why should VAT be charged on the cost of fixing it?

The answer lies in how VAT applies to construction and property works. Remedial works to an existing completed building will often be treated differently from the original construction of a new residential building. That means works such as replacing cladding or carrying out fire safety remediation may be standard-rated for VAT purposes.

If VAT is charged at 20%, the numbers can be substantial.

For example, if a cladding remediation project costs £1m, VAT could add £200,000 to the invoice.

For some businesses, that VAT may be recoverable. For others, it may be partly recoverable or not recoverable at all. This is where the commercial impact becomes serious.

VAT recovery depends on who pays

The VAT outcome is not the same for every organisation.

A VAT-registered developer may be able to recover VAT in some circumstances, depending on the structure of the project and the nature of its activities. However, a landlord, housing provider, management company or partly exempt business may not be able to recover the VAT in full.

Where VAT cannot be recovered, it becomes a real cost.

That can leave organisations having to find additional funding simply to cover the VAT element of works that are being carried out for safety reasons. In practice, this can reduce the money available for other remediation, maintenance or future housing investment.

This is why the VAT position needs to be reviewed early, before contracts are finalised and before invoices are issued.

Why cladding VAT disputes arise

The VAT treatment of cladding remediation can depend on a number of factors, including:

• who is paying for the works;
• who is receiving the supply;
• the contractual arrangements;
• whether the works relate to the original construction;
• whether the works could be treated as snagging;
• whether the payer has any right to recover VAT;
• whether the property is used for taxable, exempt or non-business purposes.

This is not always straightforward.

Some disputes arise because HM Revenue & Customs (HMRC) may view the works as standard-rated refurbishment or remedial works. Businesses may argue that, in certain circumstances, the works are more closely connected with the original construction of the building, particularly where the original build was defective or incomplete from a safety perspective.

That distinction matters because it can determine whether VAT at 20% is due.

Where the amounts involved are large, the question is not academic. A VAT dispute can affect project funding, commercial negotiations and whether a party has made adequate provision for the total cost.

Why this matters for property owners and housing providers

Cladding remediation already involves difficult practical issues. These may include identifying responsibility, securing funding, appointing contractors, managing residents, dealing with insurers and satisfying building safety requirements.

VAT can add another layer of complexity.

If a property owner assumes VAT will be recoverable and it is not, the project may suddenly become more expensive than expected. If VAT is not charged and HMRC later decides it should have been, there may be assessments, interest and penalties. If the VAT position is uncertain, the parties may need advice or clearance before progressing with confidence.

This can slow things down.

The wider policy question is whether that is acceptable where the works are safety-critical. If the Government requires unsafe cladding to be removed, there is a reasonable question as to whether irrecoverable VAT should be adding to the cost of doing that work.

That does not mean every cladding project should automatically be zero-rated. VAT reliefs need to be clear, targeted and carefully controlled. But where VAT is creating disputes, delays or unrecoverable costs, the current position deserves proper review.

The Building Safety Levy does not remove the VAT issue

The Building Safety Levy is intended to help fund remediation of residential buildings where fire safety defects have not been addressed by the original developers.

This is a positive recognition that building safety costs need a funding mechanism. However, it does not remove the need to consider VAT.

The levy may help fund remediation in some cases, but it does not automatically solve the problem of irrecoverable VAT for every property owner, landlord or housing provider. It also sits against a challenging property and construction market, where additional development costs may affect viability.

For businesses and housing providers currently dealing with unsafe cladding, the key practical issue remains the same: what VAT will be charged, can it be recovered, and how should any irrecoverable VAT be funded?

What should be reviewed before remediation works start?

Anyone involved in cladding remediation or fire safety works should review the VAT position before the project begins.

This should include:

Confirming the VAT treatment of the works

Do not assume the contractor’s VAT treatment is automatically correct. The nature of the works and the contractual arrangements should be reviewed.

Checking whether VAT is recoverable

VAT recovery depends on the payer’s own VAT position. A landlord, housing association or partly exempt business may not be able to recover VAT in full.

Reviewing whether the works link to original construction

If the works relate to defects in the original build, consider whether there is any basis for a different VAT treatment.

Considering whether HMRC clearance is needed

Where the VAT amounts are significant and the treatment is uncertain, clearance may help reduce risk before invoices are issued.

Documenting the VAT analysis

Keep a clear record of the decision, the evidence considered and the reason for the VAT treatment adopted.

Factoring VAT into budgets and funding applications

Irrecoverable VAT should be identified early so it does not become an unexpected cost later in the project.

Why early VAT advice matters

VAT on property and construction works is often fact-specific. Small differences in structure, contracts or use of the building can change the outcome.

For cladding remediation, the stakes are high because the works are usually expensive and safety-critical. A 20% VAT cost can materially affect the total project budget.

Getting advice early can help property owners and housing providers:

• identify whether VAT should be charged;
• understand whether VAT can be recovered;
• reduce the risk of HMRC challenge;
• avoid unexpected irrecoverable VAT costs;
• support funding and board approval processes;
• document a robust VAT position.

The earlier the VAT position is reviewed, the easier it is to manage the risk.

Key takeaway

Cladding remediation is a building safety issue, but VAT can have a real effect on how that work is funded and delivered.

Where VAT is recoverable, it may be a cashflow issue. Where it is not recoverable, it can become a significant additional cost. For landlords, housing providers, management companies and partly exempt businesses, that distinction is critical.

VAT should not be treated as an afterthought. It should be considered at the start of any cladding remediation or fire safety project.

The Government should also consider whether clearer guidance, faster HMRC clearances, targeted relief or grant support for irrecoverable VAT could help prevent tax uncertainty from slowing down vital building safety work.

For support with cladding remediation VAT, property VAT, VAT recovery or HMRC disputes, contact The VAT Consultancy’s Land and Property specialists or make an enquiry.

VAT errors rarely begin with a dramatic technical failure. More often, they start with a tax code, a manual workaround or a commercial change that no one revisits. In a large organisation, that decision may then be repeated across thousands of transactions before the resulting exposure becomes visible.

A regular VAT health check allows a business to look beyond whether its returns were filed on time and ask a wider question: do the VAT treatments, systems, processes and controls still reflect how the organisation operates today? The answer can reveal liabilities that need attention, but it may also uncover VAT that has been overpaid or underclaimed.

That question is increasingly important as HM Revenue & Customs (HMRC) focuses on the VAT gap. VAT investigations into medium-sized and large businesses rose by nearly a third in the year to March 2025. Timely compliance remains essential, but HMRC also wants to understand the control environment behind the figures and how a business prevents, detects and corrects errors.

Why VAT risk increases as a business grows

Size does not create a VAT problem in itself, but it magnifies the effect of inconsistency. A growing business may operate through several legal entities, sell into multiple jurisdictions, process high transaction volumes and rely on complex supply chains. VAT responsibility can also be spread across finance, tax, procurement, sales and operational teams.

• Different legal entities and VAT registrations
• New products, services and revenue streams
• UK and overseas supply chains
• Large volumes of automated transactions
• VAT decisions made across several teams
• Specialist knowledge held by only one or two people

Any one of these factors can create a gap between the VAT position a business believes it has and what happens in practice. If knowledge is not documented, a change in personnel can make that gap harder to identify and manage.

An absence of recent challenge from HMRC should not be taken as confirmation that everything is correct. A treatment may have been repeated for years without being selected for review, and an earlier HMRC visit may have focused on a different area.

A VAT health check provides a structured pause. It brings the right people together, documents how VAT decisions are made and identifies matters that require more detailed investigation.

What HMRC expects from VAT controls

HMRC is paying attention not only to whether a VAT error exists, but also to whether a business has effective measures to prevent or detect it.

In 2024, HMRC published Help with VAT compliance controls – GfC8, setting out its recommended approach to VAT accounting and compliance processes. The guidance follows the VAT data lifecycle from master data through accounts payable and accounts receivable to the VAT return. It emphasises clear ownership, documented controls and regular testing, and includes considerations relevant to Senior Accounting Officer (SAO) sign-off.

GfC8 is intended for UK VAT-registered businesses that use invoice accounting. It is not a one-size-fits-all checklist: the response should be proportionate to the organisation’s size and complexity.

Where an error emerges, evidence of clear responsibility, written procedures and control testing can help a business demonstrate reasonable care. The quality of the control environment may also be relevant to business risk ratings considered through HMRC’s Business Risk Review process and, for businesses in the SAO regime, annual certification.

What does a VAT health check examine?

The scope should reflect the business and the risks it faces. A broad VAT compliance review will usually consider:

• The VAT liability applied to sales and other income
• Input tax recovery, including partial exemption where relevant
• International VAT registrations and reporting obligations
• Reverse charge treatment on overseas purchases
• VAT return preparation, reconciliations and supporting records
• Master data, tax codes and enterprise resource planning (ERP) system logic
• Evidence supporting zero-rated exports of goods
• Roles, process documentation, control ownership and testing

A health check does not always need to cover the whole business. A targeted review may be more useful where management is concerned about a new income stream, overseas activity, input tax on a particular category of spend or the configuration of a specific system.

Common VAT issues uncovered by a health check

Because a VAT health check follows transactions and decisions through the business, it can expose issues that are not obvious from the VAT return totals alone. Examples include:

• New products or income streams introduced without a fresh VAT analysis
• Internal recharges or other revenue omitted from the VAT review process
• Reverse charge VAT not applied to relevant overseas costs
• Input tax claimed too cautiously or recovered in excess of entitlement
• Incomplete evidence for zero-rating exported goods
• Property income, cost recharges or other ad hoc transactions overlooked
• System coding that no longer matches the business’s activities

Each issue may create a liability, but the review should not focus only on tax owed. Input tax testing may identify missed recovery, while a wider process review can reveal ways to manage VAT more efficiently in future.

Business change is a key trigger for a VAT review

Many businesses begin with a workable VAT setup. Risk develops when commercial activity changes but the VAT map, system configuration or documented process does not change with it.

Expansion overseas may create new registration and reporting obligations. A new service or income stream may require a different VAT treatment. Acquisitions and restructures can affect VAT groups, intercompany recharges, processes and systems. The commercial decision may be entirely sound, but its VAT consequences are not always built into implementation.

A review is particularly valuable after:

• Rapid growth or a change in business model
• Launching a new product, service or revenue stream
• Entering a new country or changing supply routes
• An acquisition, disposal or group reorganization
• A finance-team restructure or change in key VAT personnel
• Implementing or materially changing an ERP system or tax engine

Taking stock at these points allows finance and tax teams to align the business’s current activities with its documented VAT position and actively manage anything that has been missed.

Technology can multiply good and bad VAT decisions

ERP systems, tax engines and automation can improve consistency and reduce manual effort. They can also repeat an incorrect VAT treatment at scale. One coding or master-data decision may affect thousands of transactions before an exception brings it to attention.

A system may have been configured correctly when it was implemented but no longer reflect new products, international activity or changes in the supply chain. Reviewing master data, VAT codes, exception reporting, manual adjustments and change controls can provide assurance that the technology remains fit for purpose.

The aim is not to inspect every transaction individually. It is to test the logic, ownership and controls that determine how transactions are treated.

What if the VAT health check identifies an error?

Early identification gives the business more control over the response. Correcting the position promptly can limit ongoing interest and help manage potential penalties where VAT is owed to HMRC.

Not every finding means additional tax is due. A review may show that output VAT has been overpaid, input tax has been underclaimed or VAT recovery could be improved. It can therefore produce refund opportunities as well as remediation actions.

How often should a business carry out a VAT health check?

As a practical baseline, businesses should consider an independent VAT review at least every four years because correction and claim periods can extend across the previous four years. A more frequent cycle may be appropriate for organisations experiencing rapid growth, international expansion, system change or regular changes to their business model.

Regular VAT health checks are also valuable before seeking investment or preparing a business for sale. VAT issues frequently surface during due diligence; identifying them earlier reduces the risk of unexpected liabilities affecting valuation, negotiations or transaction timetables.

Useful questions to ask include:

• When did the business last have an independent VAT review?
• Have recent commercial changes been assessed for VAT?
• Are the main VAT processes and controls documented, owned and tested?
• Does ERP coding still reflect current products, services and supply chains?
• Has the business checked whether it is recovering all VAT to which it is entitled?

If any of these questions are difficult to answer confidently, a VAT health check may be worth prioritising. Proactive review is usually less costly than correcting an issue after it has affected several years of transactions or been identified during an HMRC enquiry or corporate transaction.

How The VAT Consultancy can help

The VAT Consultancy works alongside in-house finance and tax teams to provide VAT risk management and control support. A review can cover the end-to-end VAT position or focus on a particular risk, process or business area. We can map processes and controls, review technical treatments, identify remediation and recovery opportunities, and assess whether systems support accurate VAT reporting.

Our team also supports businesses with ERP systems and tax engines, helping test the data and logic that drive VAT determination. To discuss a VAT health check tailored to the size, complexity and priorities of your business, please contact us

Insurance VAT recovery is rarely determined by a single percentage. For insurers, brokers and wider insurance groups, the final position depends on what each business supplies, where customers and insured parties are based, how costs are incurred and whether the group structure reflects commercial reality.

When those factors are not reviewed together, Value Added Tax (VAT) can become embedded in technology, property, professional fees and outsourced services without the business recognising why. The result may be unnecessary cost, an overstated VAT claim or a partial exemption method that no longer matches the business.

A useful review starts with a practical question: where is VAT being incurred, and which activities do those costs actually support?

Exempt premiums are only part of the picture

The supply of insurance is generally exempt from VAT. That distinction matters: an exempt supply is different from a zero-rated supply because it does not normally give the insurer a right to recover the VAT on directly related costs.

Life, motor and property insurance premiums will commonly be exempt, as will reinsurance and qualifying brokerage or intermediary services. Certain claims-handling and policy-administration activities can also fall within the exemption, but only where their nature and the supplier’s role meet the relevant conditions.

Other work performed by the same group may be taxable. Examples include risk consultancy, data analysis, software licensing, separately supplied back-office support and management services charged to a customer outside the VAT group. A commercial property letting may also be taxable where a valid option to tax applies.

The correct answer depends on what is actually supplied. Treating all claims-related services as exempt, or all outsourced administration as taxable, can produce the wrong result.

Follow the revenue before reviewing the VAT

An insurance group should map its income before testing the amount of VAT it can claim. The categories to separate include:

• Exempt insurance, reinsurance and qualifying intermediary income
• Taxable consultancy, management, technology and commercial property income
• Overseas services that would be taxable if supplied in the UK
• Qualifying insurance or intermediary supplies carrying deduction rights under the specified supplies rules
• Dividend income and other amounts that are outside the scope of VAT
• Transactions disregarded because they take place between UK VAT-group members

These categories do not all belong in the same part of the partial exemption calculation. Classifying an overseas transaction or internal recharge incorrectly can affect the recovery percentage before any individual purchase invoice is considered.

Start with costs, not just percentages

Partial exemption applies where a VAT-registered business incurs costs used for both supplies carrying a right to deduct and exempt supplies without that right. The calculation begins with attribution rather than simply applying one recovery rate to every invoice.

VAT on a cost used solely for taxable consultancy or a qualifying overseas supply may be recoverable in full. VAT on a cost used solely for exempt UK insurance business will usually be blocked. Costs supporting both activities, such as premises, finance systems, audit work and general legal advice, are residual and require apportionment.

This makes coding, invoice descriptions and cost-centre ownership important. If expenditure that should be directly attributed is left in the overhead pool, the business may either lose a legitimate VAT claim or recover too much. An annual adjustment is also needed to reconcile the position across the VAT year.

Why turnover can misrepresent an insurer’s cost use

The standard partial exemption method broadly measures deductible turnover against total relevant turnover. That may work for a relatively simple business, but premium income can dominate an insurer’s figures without showing how the business actually uses its people, systems or property.

A taxable advisory or technology function might use a substantial share of group resources while generating far less turnover than the insurer’s premium book. A pure turnover calculation could therefore restrict VAT recovery beyond what the economic use of those overheads justifies.

When the standard method must be challenged

A standard method override can be required where the normal calculation produces a result that is not fair and reasonable. It is generally considered where annual residual input VAT exceeds £50,000; for some related undertakings outside the same VAT group, the relevant threshold is £25,000.

The difference must also be substantial. In broad terms, this means an amount exceeding £50,000, or an amount exceeding 50% of residual input VAT and amounting to at least £25,000. The comparison is made against a method that better reflects the actual use of the relevant costs.

Repeated override calculations may be a sign that the business needs more than a year-end correction. It may need an agreed method designed around the insurance operation itself.

Build a special method around the business

A Partial Exemption Special Method (PESM) can replace the standard turnover calculation where another basis provides a fairer view of how residual expenditure is used. HM Revenue & Customs (HMRC) has published an insurance-sector framework to help businesses develop appropriate approaches.

Depending on the organisation, a suitable method could use:

• Time spent by teams on exempt and deductible activities
• Employee numbers or salary expenditure by business function
• Property occupation or floor-space allocations
• Policy, claim or transaction volumes where these reflect cost use
• Accounting allocations or other reliable operational data
• Separate calculations for distinct parts of a diversified group

A special method needs written HMRC approval before it is used or changed. The business must be able to explain why the method is fair, operate it consistently and revisit it when acquisitions, reorganisations or new product lines change the underlying facts.

Overseas insurance income: check the customer and the insured

International activity can increase input VAT recovery, but only when the relevant deduction conditions are satisfied. A consultancy service supplied outside the UK may carry a deduction right if it would have been taxable had it been supplied here. Certain otherwise exempt insurance, reinsurance and intermediary services can also qualify under the specified supplies rules.

The analysis does not stop with the address on the invoice. The business needs to identify the actual service, the contractual recipient, the place of supply and, where relevant, the location of the insured party. For insurance intermediary services from 1 January 2024, the position turns on whether the final consumer or insured belongs outside the UK.

A foreign customer does not automatically make a transaction deductible. Equally, treating all non-UK insurance income as ordinary exempt turnover may leave valuable recovery unclaimed.

An opportunity to revisit pre-2024 intermediary claims

HMRC has clarified that some insurance intermediaries can reconsider earlier VAT periods where they supplied qualifying services to a customer outside the UK. For accounting periods ending on or before 31 December 2023, recovery may be available even if the insured person was UK-based.

The normal four-year statutory limit still applies, so older periods will fall out of time. Any claim should be supported by the commercial agreements, evidence of the customer’s location and an updated partial exemption calculation. The rules applicable from 1 January 2024 are different and should not be applied retrospectively to qualifying historic periods.

VAT grouping can remove one cost while leaving another

A UK VAT group generally treats transactions between its members as disregarded for VAT purposes. This can remove VAT from internal management or administrative recharges that might otherwise create an irrecoverable cost for an exempt insurer.

However, VAT grouping is not the same as full VAT recovery. The VAT group’s external supplies determine its overall recovery position, and VAT charged by third-party suppliers remains subject to the appropriate direct attribution and partial exemption treatment.

A group change can also affect an agreed special method, existing Capital Goods Scheme calculations and the treatment of international establishments. Membership decisions should therefore be assessed before a company joins or leaves, rather than after the next VAT return has been prepared.

Shared-service companies need their own review

Centralised companies often handle finance, compliance, procurement, technology and payroll for several group businesses. If the service company sits outside the VAT group, its charges to an insurer may attract VAT that cannot be reclaimed in full.

Bringing that company into the VAT group may remove VAT on the internal recharge, but it also brings the company’s third-party expenditure into the group’s wider recovery calculation. The right structure depends on who receives the underlying supplies, which external activities benefit and whether any cross-border services trigger a separate VAT charge.

Holding companies: activity matters more than ownership

Merely owning shares in subsidiaries and receiving dividends does not normally amount to an economic activity for VAT purposes. A passive insurance holding company will therefore struggle to recover VAT on costs linked solely to that ownership.

The position may improve where the company genuinely supplies management or other taxable services for payment. But contracts alone are not enough: the holding company must receive the relevant third-party supplies and demonstrate how the expenditure supports an actual economic activity. VAT grouping and partial exemption can still restrict the result.

Overseas purchases and hidden reverse-charge costs

Software subscriptions, specialist advice, overseas support functions and cross-border group services can all create a UK reverse-charge obligation. The UK business may need to account for output VAT on the imported service, even when the overseas supplier does not add VAT to its invoice.

A fully taxable business may offset the corresponding input VAT. An insurance group with restricted recovery cannot always do so, meaning part of the reverse charge becomes a real cost. Intercompany cost allocations can be particularly easy to miss where they are recorded in the accounts without a conventional supplier invoice.

Capital assets: the rules changed in July 2026

The Capital Goods Scheme (CGS) adjusts VAT recovery on certain high-value assets as their use changes over time. Qualifying land and buildings can remain within the scheme for up to ten years, so a new partial exemption percentage, reorganisation or change in VAT-group membership can affect earlier VAT recovery.

For relevant property expenditure from 29 July 2026, the VAT-exclusive threshold for qualifying land, buildings and civil engineering works is generally £600,000. Earlier qualifying property expenditure was generally assessed against a £250,000 threshold.

Computers and computer equipment acquired from 29 July 2026 are no longer brought into the scheme. Existing assets already caught under the previous rules continue through their original adjustment periods, so the historic asset register still matters. Technology, software and data-centre projects need to be analysed according to what is actually being acquired: a qualifying property fit-out is not the same as a software licence.

What an effective insurance VAT review should cover

A focused review should connect the group’s commercial activities, accounting data and VAT calculations. The priority questions include:

• Are insurance, brokerage, claims-handling and support services classified correctly?
• Have deductible overseas supplies been separated from ordinary exempt income?
• Can the business evidence customer location and, where needed, the location of the insured?
• Are costs directly attributed before the residual recovery percentage is applied?
• Does the standard method fairly reflect cost use, or is an override or approved special method needed?
• Do VAT-group membership and shared-service arrangements still support the intended outcome?
• Are overseas supplier invoices and intercompany allocations triggering reverse-charge VAT?
• Are capital assets recorded under the right pre- or post-July 2026 rules?
• Could pre-2024 intermediary income support a time-sensitive historic claim?

The aim is not simply to increase a recovery percentage. It is to reach a result that is accurate, commercially sensible, properly evidenced and capable of standing up to HMRC scrutiny.

How The VAT Consultancy can help

The VAT Consultancy’s insurance-sector VAT specialists advise insurers, brokers, reinsurers, claims handlers and intermediaries on VAT liability, partial exemption, specified supplies, group structures and historic recovery opportunities. We can review your existing method, identify where VAT is being trapped and support discussions with HMRC where a revised approach is appropriate.

Our VAT risk management and control team can also help strengthen your processes, while our VAT cost-reduction specialists can assess whether recoverable VAT has been overlooked. To arrange an insurance VAT recovery review, contact The VAT Consultancy.

Sources

• HMRC: Partial exemption (VAT Notice 706)
• HMRC: Insurance sector partial exemption framework
• HMRC: Insurance (VAT Notice 701/36)
• HMRC: VAT deduction on overseas insurance intermediary services
• HMRC: Changes to the VAT Capital Goods Scheme
• HMRC: Group and divisional registration (VAT Notice 700/2)
• HMRC: VAT recovery by holding companies
• HMRC: VAT on services from abroad