VAT and Property Transactions: Navigating Costly Traps
Property VAT is one of the most complex and high-risk areas for businesses. The sums involved are large, the rules are technical, and the penalties for mistakes can be severe.
At ETC Tax, we regularly see avoidable VAT errors that lead to irrecoverable costs, HMRC disputes, or costly deal delays.
With this in mind, we have put together a checklist to help you avoid the most common traps.
The Option to Tax (OTT), Miss It and Pay the Price
Why it matters:
Opting to tax allows a business to charge VAT on rent or sales and reclaim VAT on associated costs (like refurbishments or legal fees). However, an OTT is only valid if properly made and recorded.
Check that:
The OTT has been formally notified to HMRC.
The landlord’s position is confirmed in writing.
Accurate records of the election are kept for future reference.
Common mistake: Assuming an OTT was made when it wasn’t. We often see clients who have incurred six-figure refurbishment costs, only to find their VAT claim rejected because no valid OTT was in place.
Tip: Always confirm OTT status before incurring expenditure.
Transfer of a Going Concern (TOGC), Relief or Risk?
Why it matters:
Where a property sale is part of a wider business transfer, VAT may not apply if the deal qualifies as a TOGC. This saves VAT on the purchase price and reduces SDLT, but only if strict conditions are met.
Check that:
Both buyer and seller are VAT-registered.
The property will be used for taxable business purposes.
Any Option to Tax is valid and in place.
Common mistake: Assuming TOGC applies without checking the conditions or obtaining VAT registration in time.
Tip: Confirm TOGC eligibility early; structuring errors can add millions to a deal.
Partial Exemption, Managing Mixed Supplies
Why it matters:
If your business makes exempt supplies (e.g. residential lettings, education, health, or finance), you may not be able to recover all input VAT. The partial exemption rules determine how much you can reclaim.
Check that:
The standard method of VAT recovery produces a fair result.
You’ve considered applying for a special method if the standard one is unfair.
Any special method is agreed with HMRC in advance.
Tip: Specialist advice can help negotiate fairer recovery rates and defend them in HMRC reviews.
Overlooked Areas, Deposits, Inducements, and Break Payments
Why it matters:
Payments such as deposits, lease inducements, dilapidations, and break fees can all have VAT implications. HMRC has become increasingly aggressive in challenging incorrect treatments.
Check that:
You’ve identified all side payments in the transaction.
You’ve clarified whether each payment is consideration or compensation.
VAT advice has been sought before contracts are signed.
Common mistake: Reviewing VAT treatment after signing agreements, when it’s too late to change the terms.
Tip: Early review avoids disputes and unplanned VAT costs.
Why Specialist VAT Advice Matters
Property VAT is too complex to rely on assumptions or generalist advice. Getting specialist input early protects both value and compliance.
Contract and lease reviews to confirm VAT treatment.
Advice on Options to Tax and TOGC eligibility.
Support with partial exemption calculations and HMRC negotiations.
Guidance on complex payments (deposits, inducements, break clauses).
Representation in HMRC disputes or recovery challenges.
Next Steps
VAT on property can be difficult to navigate, but with the right planning, most risks are avoidable.
Missed OTTs, incorrect TOGC assumptions, poor partial exemption management, or overlooked payments can all cost thousands, but with early specialist advice from ETC Tax we can safeguard VAT recovery and keep your transactions on track. Please get in touch to find out how we can support you.
Top 5 Tips: Reclaiming VAT on Entertainment & Staff Expenses
Understanding what VAT you can and can’t reclaim can save your business money — and help you stay on the right side of HMRC. Here’s your quick-reference guide to get it right.
1 Business Entertainment – No VAT Recovery
Definition: Hospitality for non-employees (e.g., clients or suppliers).
Examples:
Client meals and drinks
Tickets to concerts or sports events
Corporate hospitality days
VAT Tip:
❌ You cannot reclaim VAT on these expenses — HMRC considers them a business choice, not a necessity.
2 Staff Entertainment – Full VAT Recovery
Definition: Entertainment solely for employees (excluding directors, partners, and sole traders).
Examples:
Staff parties or BBQs
Team-building days
Staff award events
VAT Tip:
✅ You can reclaim full VAT — but only for employees (not directors or owners).
3 Mixed Entertainment – Partial VAT Recovery
Definition: Events where staff and clients attend together.
VAT Tip:
✅ Reclaim VAT on the staff portion only where acting as non-hosts (excluding directors).
❌ No VAT recovery on the client portion.
Example:
A dinner for 10 staff and 5 clients → You can reclaim two-thirds of the VAT.
4 Staff Expenses You Can Reclaim VAT On
Business travel meals
Hotel stays for business
Office supplies and equipment
VAT Tip:
✅ Make sure the expense is for business use only.
You cannot reclaim VAT on:
Commuting costs
Personal items
Anything for private benefit
5 Keep Strong Records
Keep valid VAT invoices for all expenses
Clearly separate staff and client costs on invoices
Review expense policies regularly
VAT Tip:
✅ Good record-keeping makes reclaiming VAT easier and safer during inspections.
Final Reminder:
❌ No VAT on client entertainment
✅ Full VAT on employee-only events (non-directors)
➗ Apportion VAT for mixed events
📄 Keep detailed records
Need Help?
VAT rules can be tricky — mistakes could lead to costly penalties. If you would like further VAT advice, Jane Deeks will be able to assist on all VAT matters, please drop us an email – enquiries@etctax.co.uk
Making Tax Digital (MTD) for Self Assessment is a UK government initiative that requires self-employed individuals and landlords with income over £50,000 to keep digital records and submit quarterly updates to HMRC using MTD-compatible software.
When will Making Tax Digital Apply?
It will apply from April 2026, with those earning between £30,000 and £50,000 joining from April 2027. The aim is to make the tax system more efficient, accurate, and easier for taxpayers.
MTD Basics and Thresholds
Are quarterly tax payments required under MTD?
No, not yet. While quarterly updates are required, HMRC isn’t (yet) asking for quarterly tax payments. However, penalty points will apply for late or missed updates, and once enough points are accumulated, financial penalties could follow.
What income is to be reported on quarterly updates?
Currently, it is only rental income and self-employment income that are included if they exceed the threshold. This also includes foreign property income.
Is the threshold cumulative or split between each income source?
The threshold is cumulative. Therefore, if you earn £25k from self-employment and £25k from property, you will meet the requirements to register for MTD.
If a taxpayer’s income is over £50k in 2024/25 but drops below in 2025/26, will they still be required to join MTD?
Yes. Mandation will be based on known income at the start of the regime (6 April 2026), and individuals will need to comply for at least 3 years, even if their income later falls below the threshold.
Can someone voluntarily join MTD even if under the threshold?
Absolutely. Voluntary participation is encouraged, especially now, during the testing which can help both advisers and clients become familiar with the new system.
Who and what is included in MTD?
Is partnership income included in MTD for self-assessment?
No. Partnership income is not within the scope for MTD at this stage.
Is foreign property income included in qualifying income?
Yes, foreign property income counts towards the qualifying threshold alongside self-employment income and UK property income.
I have heard foster carers are exempt, is this true?
Currently, foster carers are exempt from MTD even if their qualifying income exceeds this threshold.
The quarterly reporting requirements
What are the quarterly deadlines?
Quarterly updates are due 1 month and 7 days after the end of each quarter.
Can taxpayers switch between tax quarters and calendar quarters for ease?
Any qualifying individual can choose their reporting quarters on sign-up, but changes can only be made at year-end, not during the year. So it is vital to ensure the correct date is picked.
Are spreadsheet records still acceptable?
Yes. However, a bridging software must be used to connect spreadsheet data to HMRC’s systems for submission.
If an individual makes an error, can updates be adjusted in the next quarter’s submission?
Yes. Quarterly updates are cumulative, so adjustments can be made in the following update if something was missed in the earlier period. This is all finalised in a self-assessment tax return.
Client scenarios
What if you have a 90-year old client who doesn’t understand technology but earns over £50k?
Unfortunately, HMRC argue that age alone isn’t a valid exemption. HMRC looks at individual circumstances and capability. If applying for an exemption, provide a full context, simply stating an age will not suffice.
Can a taxpayer opt out of MTD?
Only if they meet very specific exemption criteria, such as digital exclusion. These criteria will be outlined on Gov.uk. Otherwise, participation is legally mandatory.
Will HMRC support improve?
HMRC has pledged enhanced support, especially for those joining testing this year. It’s a great opportunity for taxpayers and their agents to gain early access to extra guidance and feedback.
MTD for Landlords & Property Income
Do taxpayers need to separate residential and commercial property income under MTD?
No. If an individual currently reports both under one property income entry on their SA return, they should do the same in MTD quarterly updates.
Is a VAT-registered self-employed person also required to file MTD for income tax?
Yes. MTD for VAT and MTD for ITSA are separate obligations. However, digital records can often overlap, especially if they cover the same income streams.
Benefits and Costs
What are the actual benefits of MTD for taxpayers?
Better accuracy, improved record-keeping, fewer lost receipts, and access to real-time financial data. This helps both tax compliance and business decision-making.
What’s the benefit to HMRC in receiving quarterly information?
HMRC can offer more accurate tax estimates, pre-populate data, and reduce future discrepancies, leading to smoother year-end processing.
Are MTD software and accountant fees tax deductible?
Yes. Software costs are allowable expenses, just like any other tool or service used in the course of business.
Software & Tech Setup
Will HMRC provide free software for MTD ITSA?
HMRC will not provide its own software but has confirmed that some free options will be available from third-party developers, suitable for basic needs.
Can different agents submit updates on behalf of the same client (e.g., a bookkeeper for quarterly updates and an accountant for year-end)?
Yes, this is possible as long as both are properly authorised agents with access. Coordination is key to avoid submission issues.
What kind of bridging software is acceptable for MTD ITSA?
Bridging software must be HMRC-recognised and able to link digital records (e.g., from Excel) to the MTD platform to submit updates and End of Period Statements.
Practical Scenarios
How does MTD apply to clients with irregular or seasonal income (e.g. farmers or festival traders)?
Even if income is irregular, quarterly updates must still be submitted. They may contain zero income or expenses for that period, which is acceptable.
What happens if a client has multiple sources of property or self-employment income?
They will need to submit a separate set of quarterly updates for each business or property type (e.g., one for self-employment, one for UK property).
Can clients use multiple software systems for different parts of their income (e.g. one for property, one for self-employment)?
Yes – as long as the systems are compatible with MTD and can successfully submit each quarterly update and EOPS, this is allowed.
Next Steps
If you have complex tax needs that ETC Tax can support you with please get in touch.
A Management Buyout (MBO) involves a company’s managers purchasing either:
The shares of the company, or
The trade and assets of the company (to become shareholder-directors).
The management team must decide between:
Buying shares of the company (retaining the company’s history and allowing the use of any existing tax losses), or
Setting up a new company to purchase the trade and assets of the target company.
Capital gains/loss considerations for a management buy out
Share disposal for the individual selling their shares/assets.
Seller might be able to benefit from Business Asset Disposal Relief (BADR) if conditions are met.
For the company being sold, there is no break in their accounting period and it continues to trade as normal.
Buying at less than market value (shares)
If employees (management) pay less than market value for shares, the discount is treated as employment income.
They’ll be taxed on the difference between market value and the price paid.
The shares are likely considered readily convertible assets, therefore subject to Class 1 NIC.
Buying at less than market value (trade and assets)
If employees (management) pay less than market value for trade and assets, the same employment income tax rules apply as above.
The taxable amount is the difference between market value and the amount paid.
Cost adjustment – CGT base cost
Any employment income taxed due to undervalue will be added to the capital gains tax base cost of the shares/assets for future disposal calculations.
Loan to fund purchase
Management will likely need to borrow funds to finance the share purchase.
This is treated as a qualifying loan if it’s used to buy shares in a close company or employee-owned company.
Interest on the loan is deductible for income tax purposes.
Hive down
A hive down is another method to acquire a company.
It provides a way for a buyer (either a third party or the MBO team) to acquire a clean company (i.e., without historical liabilities) whilst still purchasing shares rather than the trade and assets directly.
This approach also allows the buyer to acquire only part of the target company.
Example
For example, say Mr A owns A Ltd. The management want to buy A Ltd. A new company is set up by Mr A, called Newco Ltd. A Ltd transfers its trade and assets to Newco Ltd – this is a normal transfer of trade and assets which would be a succession as 75% ownership is unchanged as Mr A owns at least 75% in both A Ltd (the seller company) and Newco Ltd (the buyer company).
The losses can transfer with the trade. In addition, as the history of the old company is not transferred, Newco Ltd is a clean company.
The management team (or third party) then buy the Newco Ltd shares from Mr A – this is a normal sale of shares. The management team (or third party) have purchased shares but in a clean company.
Next Steps
Please get in touch of you have any further questions regarding management buy outs
