The phrase ‘opening up a can of worms’ is much-used in the world of tax. I am afraid that HMRC might be doing exactly that with their proposals to change the law on how VAT is accounted for on mixed supplies. I’ll explain the current rules and HMRC proposals with a practical case study. The proposals are contained in VAT and Value Shifting consultation.
Bundle of goods or services
A mixed supply for VAT purposes occurs when a ‘bundle’ of goods or services are sold for a single price to a customer, and the items within the bundle attract different rates of VAT. However, if any of the goods or services are ‘incidental’ to the main supply, they are ignored. So, for example, if you buy a standard rated washing machine that includes a zero-rated leaflet on how to operate the machine, you ignore the leaflet – you pay 20% VAT on the entire price.
Boat trip with meal
Let me introduce you to Barge Ltd. The company’s business model is very simple: customers enjoy a two-hour canal trip and a three-course meal for a single price of £45. How much of the £45 is subject to VAT, ie linked to the standard-rated catering? And how much is zero-rated as a supply of transport in a vehicle designed for ten passengers or more?
The answer is that the company can currently apportion output tax using any method that is ‘fair and reasonable’ – no method is prescribed in law. But HMRC proposes to change that situation:
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