4.8 VAT and Business Property Relief

VAT: scope, supply, input and output

Value Added Tax (VAT) is a tax on taxable supplies of goods or services made in the United Kingdom by a taxable person in the course or furtherance of a business. A taxable person is a person who is, or is required to be, registered. The output tax charged to customers is accounted for to HMRC. The input tax incurred on purchases is recovered to the extent it is attributable to taxable supplies (standard-rated, reduced-rated, or zero-rated). Input tax attributable to exempt supplies is generally irrecoverable, subject to partial-exemption de minimis tests the question will specify.

Classification of the supply decides both the output rate and the input recovery:

• Standard-rated and reduced-rated taxable supplies: output tax is due at the rate given in the question; related input tax is recoverable.
• Zero-rated taxable supplies (for example many basic foods, books, and children's clothing — the question will identify the class): output tax is 0%, but the supply is still taxable, so related input tax is recoverable.
• Exempt supplies (for example much insurance, many financial services, and some supplies of land): no output tax, and related input tax is blocked.
• Outside the scope (for example a pure share sale that is not a taxable supply, or a transfer of a going concern that meets the TOGC conditions): not a VAT supply at all if the conditions are met.

Place of supply rules decide whether the supply is in the UK. Goods are generally supplied where they are located when dispatched or where they are installed. Services follow a business-to-business general rule (where the customer belongs) and a business-to-consumer general rule (where the supplier belongs), with exceptions for land-related services, admission to events, and certain digital services. Use the place-of-supply facts in the question; do not invent a rate to compensate for a place-of-supply error.

Registration, invoices, returns, payment and records

Compulsory registration is required when taxable turnover in a 12-month period exceeds the statutory registration threshold, or when the person expects to exceed the threshold in the next 30 days. The threshold figure is given in the question. Registration is with HMRC; output tax is then due on taxable supplies from the effective date. Voluntary registration is available below the threshold and is often used by a start-up that incurs large input tax on set-up costs and makes taxable (including zero-rated) supplies. Deregistration is possible if taxable turnover falls below the deregistration threshold (also given if needed). A group of companies under common control may apply for VAT group treatment so that intra-group supplies are disregarded.

A registered person who makes a taxable supply to another taxable person must issue a VAT invoice containing the statutory particulars: identity of supplier and customer, supplier's VAT registration number, invoice number and tax point / invoice date, description of the goods or services, quantity, the VAT-exclusive amount, the rate, and the VAT amount. Less detailed invoices are allowed for smaller amounts if the question invokes that rule. The tax point (time of supply) is generally the earlier of invoice, payment, or basic tax point (removal of goods / performance of services), subject to the 14-day invoice rule.

Returns are usually quarterly (some traders are monthly; a few annual-accounting schemes exist). The trader declares output tax, deducts recoverable input tax, and pays the net amount by the due date stated on the return (or claims a repayment if input exceeds output). The Making Tax Digital record-keeping duty requires compatible software for VAT-registered businesses above the exemption the question identifies.

Records must be kept to substantiate every figure on the return: invoices, credit notes, import documents, and the VAT account. The statutory retention period is 6 years (longer if HMRC is investigating). Failure to keep records, to issue invoices, or to file and pay on time produces penalties and interest. Input tax may be blocked regardless of records on items such as business entertainment and, in many cases, the purchase of a motor car that is not a qualifying commercial vehicle or taxi.

Inheritance Tax: business property relief only

FLK1 Business Law and Practice includes business property relief (HMRC now often says Business Relief) and not the rest of Inheritance Tax. Nil-rate bands, spouse exemption, the residence nil-rate band, and the IHT account on death are FLK2 Wills and Intestacy topics. In this section you only decide whether an asset is relevant business property, whether the ownership period is met, whether excepted assets must be carved out, and whether relief is at 100% or 50% — then, for deaths and transfers on or after 6 April 2026, whether the combined 100% allowance (shared with agricultural property relief) has been used up.

Relevant business property includes: a business or an interest in a business (sole trade or partnership); unquoted shares in a company; quoted shares that gave the transferor control; and land, buildings, plant or machinery used wholly or mainly for the purposes of a business carried on by a company the transferor controlled or by a partnership of which the transferor was a partner. The business must be a trading business. A business that consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments, is not a qualifying business. Cash piled up beyond working-capital needs is often an excepted asset.

The transferor must have owned the property for at least two years immediately before the transfer (with replacement-asset and successive-transfer rules if the question gives a death-of-spouse or sale-and-replace timeline). Excepted assets (IHTA 1984 s.112) are assets not used wholly or mainly for the business throughout the two-year period (or that period of ownership, if shorter) and not required for future use in the business. Relief is given only on the value that is not excepted.

Rates of relief by asset type (the historic IHTA 1984 structure, still the starting point):

From 6 April 2026 the structure changes in two ways you must be able to state without inventing a number. First, 100% relief on the combined value of qualifying agricultural and business property is limited to a combined allowance. Any qualifying value above the available allowance is relieved at 50%. Unused allowance can be transferred to a spouse or civil partner. The allowance figure, and any transferred unused amount, is given in the question if you must compute IHT. Second, shares that are admitted to trading on a recognised exchange but designated as "not listed" (the AIM-style category) are relieved at 50% in all circumstances; they no longer receive unlimited 100% relief. The existing 50% categories (control of a listed company; personally owned land used by a controlled company) stay at 50%.

Worked BPR method (figures supplied). An estate includes 100% of the shares in an unquoted trading company and a buy-to-let portfolio. The question gives the values, the two-year ownership facts, an excepted-asset cash pile sitting in the company, the 100% allowance remaining, and the IHT rate. Relieve only the trading-company shares (minus the excepted cash). Apply 100% to the slice that fits the remaining allowance and 50% to the rest. The buy-to-let portfolio is an investment business and gets no business property relief. Do not then go on to compute the full IHT account unless the question has already supplied every IHT figure — that wider computation is not this topic.

Keep agricultural property relief in view only because the 2026 allowance is a combined cap. If the estate also has a farm, the farm and the trading company share one 100% pot. That is the only reason a farm appears in a Business Law answer.