HMRC NEWS
Increase in late payment penalties
The Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025 has been implemented to increase existing late payment penalties from 31st May 2025. Where tax is overdue by 15 days, the new penalty rate will be 3% of the tax outstanding (increased from 2%). Where tax remains outstanding by 30 days an additional 3% is due (increased from 2%). From day 30 onwards, an additional penalty is due calculated daily at a rate of 10% per annum (increased from 4%).
Late payment interest if you do not pay VAT or penalties on time
Since 1 January 2023, HMRC has charged VAT registered businesses late payment interest from the first day their payment is overdue until settled in full. The late payment interest has been previously calculated at the Bank of England base rate plus 2.5%. However, HMRC has now increased the interest to the Bank of England base rate plus 4%.
Revenue and Customs Brief 2 (2025): the use of VAT grouping within the care industry
The new brief advises that HMRC has identified a growing use of VAT grouping structures by state-regulated care providers to recover VAT on costs that relate to supplies of VAT exempt welfare services. These structures incorporate an unregulated entity into the supply chain between the state-regulated provider and the local authority or NHS ICB to which the supply is made. HMRC consider these VAT grouping structures to be a form of tax avoidance and with immediate effect will exercise its powers to refuse new VAT group registration applications specifically designed to implement these arrangements. In addition, HMRC is launching a programme to review and investigate all instances where it is known or suspected that an avoidance scheme is already in operation within a VAT group registration arrangement.
Apply for an exception from registering for VAT
This is newly published guidance to provide details on how to apply for exception from VAT registration if the value of taxable supplies exceeded the compulsory registration threshold temporarily. An entity may not have to register for VAT if, at the end of any month, both the following apply:
- your taxable supplies went over the registration threshold in the last 12 months (£90k)
- you can show HMRC that your taxable supplies will not go over the deregistration threshold in the next 12 months (£88k)
This procedure is called exception from VAT registration. Further details can be found on the above guidance. If you need any assistance around exception from VAT registration rules, please do not hesitate to contact Constable VAT. We have assisted a number of businesses on this matter where a one-off transaction or supply, that is unlikely to be repeated, has seen the value of a client’s taxable supplies temporarily exceed the compulsory VAT registration threshold.
Submission of final VAT returns
Under the existing VAT regulations (Regulation 25(4) of the VAT Regulations 1995 (SI 1995/2518)) a business cancelling its VAT registration must submit its final VAT return within one month from the date the cancellation takes effect, and an additional week is allowed for electronic returns. This regulation is being amended by inserting a new paragraph (4AA) which will gives the Commissioners a power to extend, by direction, the period for the making of a final VAT return, whether or not that period has expired. This change comes into force on 13 June 2025. This amendment was prompted by the fact that HMRC’s internal processing can delay the issue of the final VAT return in some cases, which makes it difficult or impossible for the business to meet the submission and payment deadline specified in the regulations.
Transfer a business as a going concern (VAT Notice 700/9)
The above guidance sets out when and how to account for VAT when a business is transferred as a going concern (TOGC). Form VAT68 is used to request the transfer of a VAT registration number from the seller (transferor) to the buyer (transferee) when a business is transferred as a TOGC and the buyer wishes to retain the sellers VAT registration number. HMRC updated its guidance (Section 10) to confirm that form VAT68 must be completed with an application to register for VAT, if the seller and buyer of a business want to apply to transfer the existing VAT registration number.
CASE REVIEW
Court of Appeal
1. Insurance: VAT liability of vehicle black box devices
The case concerns the correct VAT treatment of telematics car insurance (commonly known as black box insurance). The appellant, WTGIL (formerly known as Ingenie) was an insurance intermediary that marketed and sold specialised ‘black box’ car insurance policies which required fitting of a device to monitor driving behaviour. Ingenie submitted a VAT refund claim, in the region of £2million, seeking to recover input VAT incurred on providing and fitting the devices. HMRC rejected the claim and Ingenie appealed. You can read our summary of both the First Tier Tribunal and Upper Tribunal decisions.
Ingenie appealed to the Court of Appeal (CoA) on two alternative grounds arguing that it made taxable supplies of services to policyholders for non-monetary consideration (entering into the insurance contract) or monetary consideration (a £150 commission received for providing and fitting the devices). HMRC contended that Ingenie made only VAT exempt supplies of insurance intermediary services, either to the insurer in return for payment of a commission or to the policyholder, or to both.
The CoA agreed with HMRC, dismissing the case; however, for the different reasons than the Upper Tribunal (UT). The Court stated it was important not to lose sight of the simple point that black box car insurance is a form of insurance provided for an annual premium, designed to be attractive to younger drivers in a competitive market. The services of providing and fitting the devices were an integral and essential part of such car insurance. The Court considered the overall arrangements and economic reality, concluding it would be artificial to exclude these services from the exemption when they were indispensable to the insurance transactions. On the basis that Ingenie was providing insurance intermediary services which were VAT exempt, the service of supplying and fitting the devices must also be VAT exempt and the input VAT incurred is irrecoverable.
Constable VAT Comment: This is the third occasion on which a Tribunal or Court has considered the recovery of input VAT incurred on the purchase and installation of ‘black box’ devices. Although the reasoning varied across the decisions, all Courts have ultimately concluded that the input VAT is not recoverable. The taxpayer’s remaining recourse is to appeal to the Supreme Court. It will be interesting to see whether this is pursued, as a decision from the Supreme Court would be final and bring closure to this long-contested issue.
Upper Tribunal
2. Zero rated food items: Poppadoms
In this case, Walkers Snack Foods Limited (Walkers) appealed against the First Tier Tribunal’s (FTT) decision that its ‘Sensations Poppadoms’ (the product) should be standard-rated for VAT purposes under excepted item 5. The products are mini poppadoms made by deep-frying a dough pellet containing ingredients including potato granules, potato starch, gram flour, rice flour, and flavourings (approximately 40% potato-based ingredients). Following a multifactorial assessment, the FTT found that the product was similar to potato crisps in appearance, texture, packaging, and marketing, and were made from potato or potato starch, therefore standard rated for VAT purposes. Our summary of the FTT’s decision can be read here.
Walkers appealed to the UT on multiple grounds, which can be broadly categorised into two main areas. One of them being that potato granules should not be included in ‘the potato’ for excepted item 5, and on that basis the product did not have sufficient potato content to be ‘made from’ potato. In addition, Walkers argued the FTT erred in its multifactorial assessment, stating that it failed to give adequate weight to factors like the name ‘poppadoms’, flavours, and inclusion of gram flour.
HMRC argued that potato granules were rightly included in ‘the potato’ exception, and the UT has agreed stating that a conclusion that excepted item 5 was limited to products made from slices of potato to the exclusion of products made from potato granules seemed unlikely to be one that could have been the intention of Parliament.
With regards to Walker’s arguments against the FTT’s multifactorial assessment, the UT found no error in the FTT’s assessment and conclusion that the products were like potato crisps, given their appearance, texture, packaging, and marketing. The UT held that the FTT’s decision was reasonable based on the facts before it and upheld the decision that the Sensations Poppadoms are standard rated for VAT purposes.
Constable VAT Comment: Like a lot of food related cases, this was an interesting decision. The Tribunal took into account the intention of parliament when VAT legislation was drafted specifically to determine whether ‘potato granules’ was intended to be included as part of ‘potato’. The case highlights the complexity of ‘zero rated food items’ which often leads to ambiguity about the correct VAT treatment of certain food items. We would recommend seeking professional advice if there is any ambiguity as to the VAT liability of a supply under the ‘food’ heading. Constable VAT has considerable experience in agreeing zero-rating of food products with HMRC and we would be pleased to assist with any related queries.
First Tier Tribunal
3. Zero-rating of construction costs
In this case NHS Ayrshire & Arran Health Board (A&AHB) appealed HMRC’s decision contained in a Non-Statutory Clearance application (NSC) refusing to allow the construction of part of a building for a National Secure Adolescent Inpatient Service (“NSAIS”) to be zero rated for VAT purposes. NSAIS is a secure unit constructed in the grounds of Ayrshire Central Hospital. Patients are compulsorily detained under a Court Order for treatment and to receive the care needed. To meet the conditions of the Court Order patients are required to live in the building complex, specifically in the ‘Bedroom Wing’.
A&AHB sought partial zero rating in respect of the Bedroom Wing on the grounds that it is a distinct and separate part of the NSAIS which is used solely for a Relevant Residential Purpose (RRP) and the construction services received can be zero rated by the appointed supplier. HMRC took the view that zero rating is not available because NSAIS is a ‘hospital or similar institution’ and the Bedroom Wing is a part of the same building complex, therefore the construction services received must be standard rated and zero rating is not available.
The substantive issue before the FTT was to determine whether NSAIS is a hospital or similar institution in which case the supplies received are not zero-rated, or whether the Bedroom Wing is a distinct and separate part of the building designed or intended to be used solely for a RRP, in which case zero rating is granted.
A&AHB argued that the Bedroom Wing was considered ‘home’ for the NSAIS patients for the duration of their stay and accordingly qualifies as RRP. However, HMRC argued that the Bedroom Wing was part of the entire NSAIS building complex which was a ‘Hospital or similar institution’ which is excluded from RRP.
The FTT agreed with HMRC concluding that the building complex is a single unit which is a hospital or similar establishment. The FTT reached this conclusion taking account of various grounds including that medical treatment, therapeutic activities and medication continued in the Bedroom Wing. Any medicine or medication given to patients continues wherever the patients are and is not confined to specific areas. The description of “a typical day” stated that the Bedroom Wing may be used for habilitation and rehabilitation activities. The Tribunal found that the significant length of stay (typically between 18months to 5 years) does not mean the NSAIS cannot be a hospital or similar establishment. In addition, the Bedroom Wing does not provide all attributes of normal residential accommodation such as eating meals as this was carried out in a different building.
For these reasons, the FTT found that the Bedroom Wing is an ‘integral and inextricable part’ of the NSAIS building complex and that none of the construction costs incurred could be zero rated. The appeal was dismissed.
Constable VAT Comment: This case was complex and involved potential ambiguity, as demonstrated by the A&AHB’s initial decision to seek a NSC from HMRC. The NSC process (an application is usually submitted by a supplier) allows taxpayers to obtain HMRC’s firm view on the VAT treatment of a transaction, provided that all relevant facts are fully disclosed. Where such disclosure is made, HMRC’s response is expected to be binding. If your business is dealing with a complex matter with potentially different outcomes, and require support in preparing an NSC application, Constable VAT has significant experience in this area and liaising with HMRC on technical matters and we would be pleased to assist.
4. VAT Exemption: Examination or education
Generic Maths Limited (“GM”) appealed HMRC’s VAT assessment, in the sum of £80,118, in respect of under declared output VAT. GM supplied an online product called ‘ConquerMaths’ which included diagnostic tests and short tutorial videos on mathematics. The supply did not lead to any particular qualification and the ‘pupils’ using it can drop in and out of the offering, choosing when to access it. The product includes many hundreds of available diagnostic tests that challenge customer’s knowledge of the principles that will be taught on the various subjects relevant to pupils’ age.
GM argued that its product was an assessment led resource which enabled a pupil’s level of attainment, and any shortcomings, to be identified so that the pupil could then get any necessary teaching required from other sources and on that basis the supply was VAT exempt as a form of ‘examination service’. HMRC took the view that the supply is an ‘online learning or teaching product’ which is a supply of an educational service rather than examination service. As GM was not an ‘eligible body’ for the educational VAT exemption to apply, its supply of online educational services was subject to VAT at standard rate and raised VAT assessments on that basis.
The Tribunal applied the ‘consumer perception test’ from the Metropolitan International Schools decision and found that the typical consumer would perceive ConquerMaths as a teaching product or revision aid designed to improve maths understanding, rather than a supply of examination services. The diagnostic tests were an integral part of this educational supply, not a separate exempt examination service. The Tribunal also commented that even if a functional test was applied, as opposed to a consumer perception test, the result would be the same concluding that the supply is subject to VAT, and HMRC’s assessment was made using best judgment. The appeal was dismissed.
Constable VAT Comment: This is an interesting case considering the application of the VAT exemption for ‘examination services’. The Tribunal noted that ‘examination services’ is wider than formal public examinations but does not extend to include online revision tools. The scope of the VAT exemption for education and vocational training is governed by complex legislation, and we would recommend seeking professional advice when determining the VAT liability of supplies made. Constable VAT has the expertise in this sector and is well placed to provide support on education and training related VAT matters and would be pleased to assist with any queries readers may have.
5. Whether Aligners are VAT Exempt dental prostheses
This appeal concerns the VAT liability of supplies of Invisalign clear aligners (Aligners) made by Align Technology Switzerland GmbH and Align Technology BV (referred to together as ‘Align’). Aligners are removable orthodontic appliances used by dentists to reposition a patient’s teeth to correct misaligned teeth improving the functionality of the patient’s bite. Each Aligner is bespoke and is specially designed by Align for an individual patient, based on a scan of the patient’s mouth and in accordance with the treatment plan prescribed by the dentist and it’s purpose is to restore the natural functioning of teeth, enabling proper biting, chewing, breathing and talking.
HMRC issued decisions that supplies of Aligners were subject to VAT at the standard rate, while Align treated them as exempt supplies of dental prostheses. Align are not dentists or dental technicians but it does employ dental professionals registered in the UK. The only issue in the appeal was whether the Aligners are ‘dental prostheses’ and therefore VAT exempt.
The FTT initially considered the ordinary meaning of ‘prostheses’ taking into account its context in dental treatment concluding that, based on dictionary definitions, ‘dental prostheses’ includes orthodontic appliances, such as Aligners, that are used to move a person’s teeth. However, it also went on to consider whether including Aligners in the term ‘dental prostheses’ is consistent with the purpose of VAT exemption. The reason for the exemption is to ensure that health-related products are affordable and accessible. The FTT rejected HMRC’s interpretation of ‘dental prostheses’ which excluded orthodontic appliances such as the Aligners as this interpretation would deprive the exemption of its intended effect which is to ensure that ensure that supplies of health-related products do not become inaccessible because the cost is increased by an amount of VAT. The appeal was allowed.
Constable Comment: The Tribunal’s decision to classify Aligners as VAT-exempt dental prostheses appears a reasoned interpretation of both the legislation and the wider purpose of the VAT exemption for health-related products ensuring these are accessible without the additional cost of VAT making these supplies less affordable to patients. The case acts as an important reminder that HMRC often takes a very rigid and narrow interpretation of VAT exemption; however, case law implies that whilst a strict interpretation is needed, it must not be adopted in such a way as to deprive the exemption of its intended effect. This may lead to ambiguity and disputes about the correct application of VAT exemption sometimes resulting in litigation as in the case of Align. If you require any assistance with identifying the correct VAT treatment of any supplies or transactions in this sector Constable VAT would be pleased to assist.
Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.