VAT Update – April 2023

20 Apr 2023

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In this VAT Update we feature HM Revenue & Customs (HMRC) guidance on apportioning bundled supplies and the provision of leisure services by local authorities.

Other topics this month include:

  • Guidance from HMRC (and a recent European Court decision) with regards to online activities;
  • An Upper Tax Tribunal case regarding VAT groups and time of supply; and
  • The Drink Deposit Return Scheme in Scotland, which has been delayed until March 2024.

HMRC has recently released guidelines aimed at businesses making bundled supplies charged at a single price, where elements of the supplies have different VAT liabilities. The purpose of the guidelines is to give businesses a better understanding of how to treat the apportionment of the consideration for these supplies, and reduce the risk of their methods being challenged by HMRC.

While apportionment to calculate how much VAT is due, is required by law, there is no specific method of apportionment required, and as such, HMRC accepts any ‘fair and reasonable’ method, eg one which fairly reflects the proportion of price attributable to each supply within the bundle and is relatively simple to implement and check.

HMRC’s guidance suggests one of two methods should be applied, based on selling prices and cost prices.

Apportionment based on selling price

When each item of the bundle is available for sale separately, the low-risk method which HMRC recommends is an apportionment based on the selling price of each item in the bundle. Where the bundle is sold at a discounted price, the discount should be applied proportionally to the normal selling price of all the supplies in the bundle.

Apportionment based on cost price

For instances in which some goods or services in the bundle are not available for sale separately, a cost-price based apportionment method may be used. This is more complicated than a method based on selling prices because some costs, such as overheads, may not be directly attributable to a specific element of the bundle of goods or services being supplied. Alterations to products before they are bundled can also create issues.

To reduce the risk in apportioning costs, HMRC recommends:

  • Overhead costs are apportioned to the relevant supplies, particularly where significantly more overhead costs are used for some items.
  • Attributing types of costs is done as much as possible and to the correct supply.
  • All supplies made and costs incurred are considered.
  • Evidence is maintained to support the attribution being fair and reasonable.

Where only some costs can be identified for supplies made in the bundle, it is sometimes suitable to mark-up the identified costs and deduct them from the remaining selling price of the bundle to determine the value of other supplies.

To reduce the risk of this method it is important to ensure that:

  • The mark-up is a reasonable amount.
  • The cost element of supplies not sold in the bundle is excluded from the apportionment calculation.
  • Any profit is fairly allocated to all the supplies in the bundle.


The guidance on calculating VAT due for a bundled supply where one or more elements are subject to the 0% or 5% VAT rate has been published by HMRC as a Guideline for Compliance (GFC).

The intention of these is for HMRC to provide their view on complex or misunderstood tax matters (the scope being corporation tax and employment taxes as well as VAT). The GFC on apportioning VAT on bundled supplies is the first one covering a VAT topic and only the second GFC to be published. One of the aims of GFCs will be to help taxpayers understand HMRC’s expectations and help them to avoid non-compliance and disputes.

The GFC on apportioning bundled supplies for VAT purposes is helpful in that it highlights methods which are unlikely to be considered fair and reasonable by HMRC and therefore be open to challenge and adjustment, which ultimately could lead to assessments for underdeclared VAT and interest and penalties.

For further information and examples, full guidance is available.

Please contact Nick Hart, VAT Director for further details.

HMRC has published guidance notes on ‘Charging VAT when using an online marketplace to sell goods to customers in the UK’ and ‘Charging VAT on goods sold direct to customers in the UK’.

The guidance notes set out a seller’s VAT obligations when selling goods to customers in the UK. The VAT treatment will depend on a number of factors, including:

  • Whether a business is considered an overseas seller, or established in the UK for VAT purposes;
  • Where the goods are located at point of sale;
  • The UK VAT-registration status of the customer;
  • The value of the consignment; and
  • Whether the goods are sold via an online marketplace (OMP), or direct to customer through the seller’s own online store.

Generally speaking, businesses making direct (eg not via an OMP) sales of goods of £135 or less in value per consignment to customers in the UK, are liable to register and account for UK VAT on those sales. These include where the goods are located in the UK at the point of sale for both business-to-business (B2B) and business-to-consumer (B2C) supplies, or where they are located outside the UK at point or sale but sold to non-VAT registered UK customers. In the case of B2B supplies to UK VAT registered customers, the reverse charge applies, and the customer should account for the VAT due.

Where the sale of these low value consignment goods is completed through an OMP, the OMP is, in certain circumstances, responsible for collecting and accounting for the VAT due.

The guidance also clarifies the potential consequences where these requirements are not complied with. In addition to the normal penalties that can apply, HMRC can direct an overseas seller to appoint a UK-established VAT representative, or ask for a security (eg a cash deposit or bond), if they think there is tax or duty at risk. If non-compliance persists, HMRC can also inform the OMP, who may decide to remove the seller from their site.


The majority of the content of the guidance notes are not new but they provide a helpful reminder of the importance for overseas sellers to be aware of how these VAT rules affect their UK VAT obligations. The rules are reasonably complex and there are many factors that can affect which party should be accounting for VAT, and how VAT should be accounted for. Small changes in the supply chain could affect whether a business has an entitlement, or a compulsory requirement, to register for VAT in the UK. Businesses are reminded to regularly review their supply chains and where appropriate, to have a dialogue with the OMP to ensure that the correct party is bringing VAT to account.

More information is available:

Please contact Wendy Andrews, VAT Director if you are selling goods to customers in the UK through online channels, for advice on this issue.

HMRC has opened a consultation with respect to the draft legislation for VAT accounting for the Drinks Deposit Returns Scheme (DRS). The scheme was originally due to be introduced in Scotland from August 2023 and England, Wales and Northern Ireland in 2025. However, the scheme has been delayed in Scotland until March 2024. The DRS will cover bottled and canned drinks.

The legislation, which is being introduced through the Spring Finance Bill 2023 is intended to cover how VAT will be accounted for when deposits are charged under statutory deposit schemes. The measure will introduce new VAT accounting rules with respect to supplies that fall within the DRS and it establishes who must account for that VAT and when and how they must do so. Deposits will be 20p payable on the purchase of a canned or bottled drink.

Under existing accounting rules, VAT is chargeable on the price payable for goods including any deposit. In the event that part of the price is refunded to the customer, the VAT is adjusted to ensure that the net amount of VAT paid to HMRC reflects the amount actually paid.

The measure announced in the Spring Finance Bill sets out to achieve the same result for DRS deposits but by different means. The measure will remove the need to account for VAT on the value of the deposit when the drink is sold at each stage in the supply chain. Instead, the manufacturer or importer who first sells the product in the UK will be required to account for VAT on the value of the deposits for DRS containers that have not been returned in exchange for a deposit refund. The aim is for this to be achieved via a periodic VAT accounting adjustment.

A working example:

In the VAT accounting period ending 30 September 2024, a manufacturer sells 500 drink products for £1.00 inclusive of VAT plus the 20p deposit (also inclusive of VAT) each.

A retailer pays £1.20 to the manufacturer for each drink and then sells each one for £1.50 inclusive of VAT plus the 20p deposit. The final customers therefore pay £1.70 for each drink.

In the same period, the number of returned drinks containers is 50 and the final customers, on returning those containers, receive a refund of the 20p deposits paid.

In the VAT accounting period, the manufacturer makes an adjustment to its VAT account, the effect of which is that it pays additional VAT of £15.00 through its VAT return. This is calculated by the amount of VAT due on the deposits of drinks sold (500x20p/6= £16.66) less VAT on the deposit for the returned containers (50x20p/6 = £1.66).

The retailer does not account for VAT on the deposit amount (unless it is the first supplier in the supply chain) for drinks sold.


VAT accounting obligations under the DRS are being placed on the manufacturer or first supplier in the supply chain, and VAT will be brought to account on the value of deposits which relate to unreturned drinks containers.

The delay to its introduction will provide businesses more time to consider the proper implementation of the scheme. Once the consultation period has concluded and HMRC has published its findings, further guidance on VAT accounting under the DRS will be published on our website.

Read more on the consultation.

If you have any questions regarding VAT accounting under the DRS, please get in touch with Sean McGinness, VAT Partner.

The Prudential Assurance Company Ltd (UKUT54 2023) Upper Tax Tribunal (UT) has ruled that the time of supply rules should take precedence over the VAT grouping provisions, when determining whether a supply is subject to VAT or not.

The case concerns the provision of investment management services by Silverfleet Capital Limited (SCL) to Prudential, and whether the payment by Prudential of a performance fee to SCL, after SCL had left the VAT group, in which it was registered along with Prudential, should be subject to VAT or whether the payment was consideration for an intra-VAT group supply and disregarded. The UT, in overturning the decision of the FTT, and finding in favour of HMRC, concluded that VAT was due as the time of supply (tax point) occurred after SCL had left the VAT group.

SCL supplied Prudential with investment management services until the point it left Prudential’s VAT group in 2007. The arrangements between the two meant that SCL was entitled to receive a performance fee in addition to a management fee should the investment funds achieve a certain level of growth. This growth was achieved some years later and SCL became entitled to the performance fee which it invoiced with VAT. In reaching its conclusion, the UT determined that the legal provisions which allows supplies between companies in the same VAT group to be disregarded did not override the time of supply rules which determine when VAT becomes accountable on a supply. In this case, the investment management services are a continuous supply of services with the time of supply being the earlier of issuance of VAT invoice or date of receipt of payment.


The UT came to the correct conclusion in this case in our view. There is no legal precedence for the VAT grouping provisions to take priority over the time of supply rules, and there is compelling case law which suggests the opposite is correct – the time of supply rules take precedence over the VAT grouping rules. How elements of VAT legislation interact with other each can often be an interesting and challenging matter and working out whether any one provision takes precedence over another is not always straightforward. The case confirms that establishing the correct time of supply is critical including when entities are leaving or joining a VAT group.

Read more on the case.

If you would like to discuss the implications of this case in more detail please contact Nick Hart, VAT Director.

As noted in our September 2022 VAT update, the courts have recently decided that local authorities are acting in their statutory capacity when providing leisure facilities. This means that supplies of leisure services by local authorities are to be treated as non-business for VAT purposes.

HMRC have now published guidance on this in Revenue and Customs Brief 3 (2023). This guidance confirms that local authorities can apply non-business treatment to their supplies of leisure services. The change to HMRC guidance originates from several local authorities challenging HMRC including Chelmsford City Council [2022] UKUT 00149 (TCC).

The Upper Tribunal in Chelmsford City Council and in two of the cases, the First Tier Tribunal found that leisure services provided under a statutory framework and can be treated a non-business for VAT purposes, but it must be shown that it would not significantly affect competition. HMRC conducted a detailed analysis of this and found that there would not be any significant impact on competition.

Local authorities will no longer have to charge customers VAT at the standard rate or apply the VAT exemption for sporting services if it had been available, and instead must apply non-business treatment to income received. Local authorities are being invited to submit claims to HMRC to reclaim overpaid VAT and details of how to make a claim are included in the brief.


The non-business treatment with respect to the provision of leisure services only applies to local authorities supplying services under statue and does not apply to services supplied by a trust or a trading company owned by a local authority. In those scenarios the services being provided are by way of business and are subject to VAT (or the VAT exemption, if it is available).

Certain related supplies made by local authorities are still to be considered business activities such as supplies of sports clothing and equipment (eg swimming goggles, water bottles, and items from vending machines).

Whilst non-business activities would not yield a right to VAT deduction, under specific legal provisions, local authorities are able to reclaim VAT on costs associated with their non-business activities. VAT recovery may still be an issue however as the provision of sporting lets remains VAT exempt, in some circumstances, rather than a non-business activity.

Please contact Wendy Andrews, VAT Director for further information.

The European Court of Justice (CJEU) has provided its judgement in Fenix International Ltd C-695/20. Fenix operates the ‘OnlyFans’ online platform, which provides access to subscribers to third party content uploaded by creators. Under the terms and conditions specified by Fenix, the subscribers pay the creators for this access. The minimum subscription fee and the terms and conditions are set by Fenix which collects the payments. Fenix then passes the fees to the creators, less its commission. Fenix had been accounting for VAT on the commission element only.

In HMRC’s view, Fenix was acting in its own name and it should have been accounting for VAT on the value of the full payment received from the subscribers, rather than just its commission. The matter was appealed, and then referred to the CJEU by the UK courts.

The technical point of the case is whether Article 9a of the EU Implementing Regulation was valid and correctly implements Article 28 of the EU VAT Directive. This is the legislation which determines that an intermediary acting in their own name, but on behalf of another, is the supplier for VAT purposes and is liable to account for VAT on the full value of consideration received. Article 9a seeks to implement this within the context of electronically supplied services provided through an online platform. The CJEU concluded that Article 9a is valid because it complies with the general aims of Article 28 and seeks to implement it rather than amend it in any way.

Online marketplaces which do authorise the charge to the subscriber, the delivery of the service, or set the terms and conditions under which the service is supplied, will be the supplier for VAT purposes and VAT will be due with respect to the amount paid by the subscriber rather than just a commission element.


The Fenix case is significant not least because it is the last VAT case which UK courts referred to the CJEU (it was referred before the UK left the EU on 1 January 2021). It also provides confirmation of how online platforms, through which services are sold by third parties, can be liable for the VAT due on those supplies.

Both online platforms and parties who utilise those platforms for the purpose of generating income through the provision of content, services or products, should keep their VAT position under review to ensure they are not at risk of failing to account for VAT, where applicable. Both the EU position and the treatment of supplies through online platforms for UK VAT purposes will be relevant for those which operate across Europe.

Read more on the case.

For further details please contact Nick Hart, VAT Director.

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Sean McGinness
Partner, Edinburgh

Key experience

Sean is Head of the Edinburgh office.