HMRC NEWS
Revenue and Customs Brief 1 (2026): Removal of linked goods concession
In this recently released brief, HMRC has confirmed the withdrawal of the Extra Statutory Concession (ESC) for linked goods in VAT Notice 48, as it is no longer considered necessary. HMRC’s view is that supplies previously eligible under the concession already fall to be treated as single supplies under VAT legislation and established case law.
The withdrawal does not represent a change in HMRC policy or VAT treatment. Businesses should continue to apply the existing single and multiple supply principles set out in VATSC11113, as this should lead to the same outcome as would have been reached under the revoked concession. In practice, most minor or low-value items supplied with a main supply for a single price will continue to be treated as part of a single supply where they are ancillary or closely linked to the principal supply. Where a supply is genuinely mixed, consideration must be apportioned in accordance with section 19(4) of the VAT Act 1994.
There is no further action necessary for taxpayers as a result of this brief, as there is no change in HMRC’s policy.
Late payment interest if you do not pay VAT or penalties on time
The above guidance details the late payment interest rules and the worked example has been updated to 8.5% interest to reflect the previous decision to increase the interest percentage to the Bank of England base rate plus 4%, up from 2.5%. The current Bank of England rate is 3.75% meaning HMRC’s late payment interest rate is 7.75%.
CASE REVIEW
Supreme Court
Hotel La Tour Limited – VAT recovery on fundraising share sale
The Supreme Court has issued its long awaited decision in the Hotel La Tour case concerning the input VAT recovery in relation to costs incurred on a VAT exempt share sale. Given the importance and complexity of this case, we have done a more in-depth analysis of the VAT decision which can be read at the bottom of this VAT Focus.
First Tier Tribunal
1. VAT zero rating: Supply of books or ghost-writing service
Story Terrace Limited (STL) produced personalised life-story books for private individuals. Customers purchased a fixed package resulting in the delivery of professionally printed hardback books and a digital copy. The process involved customers being allocated a ghost-writer by STL, interviews conducted by ghost-writers, drafting and editing of the narrative, design and layout, and final printing. Customers could not purchase ghost-writing services separately; the service was structured around the delivery of a completed book.
STL believed that it made zero-rated supplies of books within Item 1, Group 3, Schedule 8 VATA 1994 stating that the book was the predominant element of a single composite supply, with ghost-writing forming part of the process necessary to produce the final book. HMRC argued that STL was instead making standard-rated supplies of ghost-writing services, relying on the bespoke nature of the service, the importance of ghost-writers in the process and the fact that pricing varied according to the seniority of the writer.
Applying the predominant element test from Levob and Gray & Farrar, the Tribunal held that the supply should be characterised from the perspective of the typical consumer. The Tribunal found that both the contractual and commercial reality was that customers were acquiring a book, described as the “final output” in the contracts, and that the entire process was directed towards producing copies of hardback books with a digital copy.
Constable VAT Comment: This interesting case provides a useful reminder of the fundamental principle that the correct VAT treatment turns on a proper identification of the nature and characteristics of a supply. Although the appellant was successful in this case, questions of characterisation can be finely balanced. Where there is any uncertainty, particularly in relation to zero-rating of any supply, professional advice should be sought, as an incorrect treatment may expose a business to assessments for underdeclared output VAT along with interest and potential penalties. In this case it seems that what was contractually supplied to the customer was a book, the client was not engaging STL to supply ghost-writing services, which would be standard rated. The FTT referenced the 1995 decision in Colour Offset Ltd which defined a book as ‘something to be read or looked at.’ The FTT found that the clients supplies were of books. We do not know the quantum involved in this case; the appeal was lodged in relation to a decision made by HMRC in respect of the STL’s 03/23 VAT return but a further 10 VAT returns will have required submission prior to the release of the decision. Having read the FTT decision we struggle to understand why HMRC felt the need to pursue this matter, and we hope that HMRC would not pursue this decision further.
2. Littlewoods Limited: Attribution of input VAT
This appeal before the First tier Tax Tribunal (FTT) concerned whether input tax incurred by Littlewoods in connection with product specific photographs is directly attributable to taxable supplies (sales of the products).
Littlewoods (the Appellant) is the representative member of a VAT group registration which includes various companies including Shop Direct Home Shopping Limited (SDHS) (which retails under brands including “Very” and “Littlewoods”) and Shop Direct Finance Company Limited (SDFC).
The Appellant operates in the online retail environment (and prior to 2015, operated through catalogues), selling retail goods (a taxable business activity). Littlewoods also offers financial products to its retail customers to facilitate their purchases. Some of these financial products are interest bearing (a VAT exempt business activity). The Appellant also offers third party backed insurance cover for some of the retail products sold receiving insurance intermediary commission (also a VAT exempt business activity). Littlewoods is partially exempt for VAT purposes and is only entitled to recover VAT incurred by it to the extent that VAT that relates to its taxable business supplies.
HMRC refused claims by the Appellant to recover input tax incurred on costs relating to product specific photographs. Littlewoods believed that the costs are only incurred for the purposes of making taxable supplies and the VAT incurred should be recovered in full. HMRC’s argued that the costs are used to promote both taxable supplies of goods and its exempt supplies of credit and insurance intermediary services and, as such, the VAT incurred is partially recoverable.
Before commenting on the case, we were interested to note that this appeal spanned VAT accounting periods 09/08 to 03/24, 16 years, the first VAT repayment claim submitted, which HMRC refused to make, was on 18 June 2012. The total VAT involved over the entire period is £2,340,213. This amount included celebrity royalties, but these sums were not in dispute at the time of the hearing.
In accordance with the legal provisions, the FTT stated that recovery of input tax will be determined by a two-stage process:
Firstly, it must be determined whether the inputs are attributed to taxable supplies, exempt supplies or both; and then where attributed to both, how mixed-use input tax is apportioned between taxable and exempt supplies. This should be on a fair and reasonable basis.
Some of the key principles identified by the FTT from case law include:
- Input tax is deductible only,
– if there is a “direct and immediate link” between the input and the taxable output supply (BLP), and
– the input is a “cost component” of the output (Midland Bank) i.e. where the costs are “used for the purposes of” the taxable supply.
- The ultimate aim of the taxpayer in incurring the costs is not relevant (BLP) and inputs must be considered component by component, not by reference to commercial links in an overall transaction (Southern Primary Housing Association [SPHA]).
- The fact that a supply would not have been made “but for” a cost incurred is not sufficient to create a direct and immediate link (SPHA).
- Similarly, a close economic or commercial link, while relevant, is not sufficient (Royal Opera House Covent Garden Foundation).
- Multi-factorial, objective assessment: the question as to whether there is a direct and immediate link is a mixed question of law and fact but is highly fact sensitive. The test is objective requiring consideration of all circumstances surrounding the transaction. (Dial-a-Phone Ltd).
The burden of proof rests with Littlewoods to establish that it is entitled to claim the input tax which is the subject of the VAT refund claims. The FTT must be satisfied, on the balance of probabilities, that the input tax is properly attributable only to the taxable retail supplies and not attributed to supplies of interest-bearing credit and/or insurance intermediation.
The Appellant explained that the costs in this case are product specific to goods sold by way of taxable retail sales. The photographs display the goods allowing customers to inspect products virtually, view them from multiple angles, and make informed purchasing decisions. This reduces returns and enhances the customer experience. The photographs in question are not used to generally promote the business as a whole and make no reference to the exempt supplies of finance/insurance. Any connection to credit or insurance sales are indirect because credit and insurance is not displayed or promoted by the photographs but by the website pop-ups and the website more generally.
HMRC’s case was based on two core arguments:
- The Appellant operates a single integrated business model involving the making of taxable and exempt supplies that are symbiotic to one another. The provision of credit is not ancillary to the supply of retail goods but central to the Appellant’s customer proposition and marketing strategy which is designed to promote both goods and credit simultaneously
- When considering the use to which the photographs are put on the website (and previously in the catalogues) objectively they are put to mixed use.
The FTT did not accept that Littlewoods integrated business model was enough to establish a direct and immediate link between the photographs or the associated costs. The FTT considered each use made of the photographs to be exclusively in the making of taxable supplies of retail goods. The Tribunal noted that any link to credit or insurance was indirect and probably non-existent given the nature of the costs. The Tribunal therefore found in Littlewoods favour and allowed the appeal. Input tax incurred in relation to the product specific photographs was recoverable in full.
Constable VAT comment: This decision provides a useful overview of relevant principles and case law relating to the attribution of VAT incurred and the recovery of input tax. There have been several cases in this area, included the recently released Supreme Court decision in Hotel La Tour. The sheer volume of litigation demonstrates that it can be very difficult to establish whether VAT incurred is directly attributable to a specific supply or activity in cases where an organisation has a variety of activities and income streams that are not all taxable supplies for VAT purposes. The steps followed by the FTT in this case provide a useful framework for considering the attribution point, and if the position is not clear, it may be worthwhile obtaining a professional opinion to ensure that taxpayers take reasonable care in the event of a dispute with HMRC later. When reviewing the decision, we were not sure why HMRC pursued the matter, its arguments, as set out in the FTT’s ruling, did not appear particularly strong. It will be interesting to see whether HMRC seeks leave to appeal the decision of the FTT to the Upper Tribunal. The decision was released on 16 December 2025, and paragraph 147 of the decision confirms that any party dissatisfied with the decision has 56 days after the decision is sent to it to appeal. HMRC issued its most recent list of VAT appeals update on 23 January 2026, and there is no mention of the case in that document, although HMRC is within the 56 day time limit allowed.
3. VAT Zero Rating: Hot food supplied to nursery
The position for contract caterers acting for schools and similar institutions has caused a great deal of confusion in the sector. Slice of Pie Limited (SPL) sees another example of a caterer being challenged where it applies zero-rating, the First Tier Tax Tribunal concluded, incorrectly.
There are agreed models to supply catering that allow a caterer to act as a principal in the supply of the foodstuffs (predominantly zero-rated), treat staff wages as a disbursement and apply VAT to management services, then serving prepared meals as the agent of the school or nursery when operating at that site. In the case at hand perhaps the position was not as sophisticated with the pre-prepared meals being delivered to the site.
SPL supplies cooked meals to nurseries. SPL prepares pre-selected meals and delivers these cooked meals to the nursery. Desserts are also provided. Upon delivery, the nursery staff take those meals and undertake the necessary steps to unpackage and serve the hot meals to the nursery pupils.
SPL argued that it supplied zero-rated food, HMRC argued that the food supplied was in the course of catering hence subject to VAT by default. The relevant law is found in Schedule 8, Group 1 of the VAT Act 1994. The legislation immediately states that catering is not within the zero-rate relief but that other supplies of food are, then listing further exceptions to that position. The immediate point argued between the parties turned around the legislative point that defined catering. This is found at Note 3 to Group 8:
(3) A supply of anything in the course of catering includes—
(a) any supply of it for consumption on the premises on which it is supplied; and
(b) any supply of hot food for consumption off those premises
SPL focussed on (a) above and argued that its food was not consumed on its own premises hence zero-rated. That somewhat ignores (b) above and the rest of note 3 which defines and determines that hot food is ordinarily a supply of catering. The Tribunal concluded that:
- SPL supplies its food on premises where the intention is that food will be consumed.
- In most senses, the ordinary consumer would view this as catering.
- In addition, a large portion of the food is purposefully served hot.
- The serving of the food and other steps by nursery staff are not sufficient to change the view that this was a supply of catering by SPL and could not override the heated aspect.
The appeal was dismissed.
Constable VAT Comment: This case serves as a reminder that catering in educational institutions such as schools and nurseries can raise complex VAT questions. We often see contract caterers trying to apply the rules for schools and other educational bodies to their own supplies incorrectly exempting or treating their supplies as outside the scope of VAT. There are models that may allow wages to be treated as disbursements and food stuffs supplied, pre-preparation, to be supplied according to their own basic VAT liability when zero-rated but this requires thought, contractual analysis and cooperation between the caterer and customer.
4. Hotel La Tour Limited: VAT recovery on fundraising share sale
This case addresses the fundamental principles around VAT recovery and the link to supplies that do or do not carry a right to VAT recovery. The attribution and recovery of VAT incurred is an important part of a VAT registered organisations VAT accounting policies and procedures. Where a VAT registered business is fully taxable for VAT purposes, making only taxable supplies or other supplies specified to carry a right to VAT recovery, it is entitled to reclaim all VAT incurred as input VAT, subject to the usual rules around blocked input VAT (business entertainment, for example). This contrasts with organisations that make VAT exempt supplies (insurance, financial services businesses) or charities and other voluntary sector organisations that have non-business activities and suffer a restriction on VAT recovery.
Where VAT incurred is incorrectly claimed as input VAT, or HMRC challenges an entitlement to deduct input VAT, the consequences can be significant. Input VAT incorrectly reclaimed may need to be repaid to HMRC, who can also levy penalties when reasonable care has not been exercised, and charge interest (with effect from 1 January 2023 HMRC no longer applies the ‘commercial restitution’ policy). That is in addition to repaying any VAT reclaimed in error to HMRC.
The decision of the Supreme Court in HMRC v Hotel La Tour Ltd (released in December 2025) is important in reinforcing the principles around the recovery of VAT incurred, particularly in relation share sales and the ‘direct and immediate’ link to a supply or activity in relation to reclaiming input VAT and delivers clarity.
This case was first heard before the First-tier Tax Tribunal (FTT) in June 2021, and we have refreshed the evolving position over the last 4 years below. This case also reminds us that disputes with HMRC and VAT litigation can be a very time-consuming matter.
Background
Hotel La Tour Limited (HLT) was a holding company which held all the share capital in Hotel La Tour Birmingham Limited (HLTB). HLT and HLTB were members of a group VAT registration, HLT was the representative member of the VAT group and supplied management services to HLTB which owned and operated a hotel business from leased premises.
HLT made the decision to construct a new hotel in Milton Keynes at an estimated cost of £34.5m. To finance the deal a decision was made to sell HLTB, and the sale proceeds were to be used to finance the Milton Keynes development.
In July 2017 HLT agreed to transfer the whole of its shares in HLTB to Dalata UK Limited. HLT reclaimed VAT incurred on professional fees in relation to the share sale as input VAT on its VAT return in respect of the VAT accounting period ending 30 September 2017 (09/17). In June 2018 HMRC issued a VAT assessment to HLT disallowing the input VAT claim (£76,822.95) on the basis that the sale of shares is a VAT exempt supply.
HLT appealed that HMRC decision on the basis that the VAT incurred was directly linked to HLT’s intended taxable activities i.e. supplies of hotel accommodation, facility hire, catering etc and that income generated from the share sale had been used to fund the construction of a hotel in Milton Keynes that would make exclusively taxable supplies.
First-tier Tax Tribunal
In 2021 the First-tier Tax Tribunal (FTT) allowed HLT’s appeal. The FTT concluded that there was a ‘direct and immediate link to downstream taxable activities’ between the costs incurred on professional fees, intended to raise funds to deliver taxable supplies, and the construction of the hotel. The costs incurred were not components of the VAT exempt share sale.
Upper Tribunal
HMRC sought leave to appeal the decision of the FTT to the Upper Tribunal (UT). The UT found that the FTT had not erred in law and supported its decision following a hearing in 2023 and dismissed HMRC’s appeal. The UT referenced various decisions of the Court of Justice of the European Union (CJEU), including Sveda and Kretztechnik, confirming that VAT incurred on professional fees in relation to a share sale can be reclaimed as input VAT in circumstances where the economic purpose of the cost incurred (sale of shares in this case) is intended to ultimately fund taxable business activities. Our summary of the UT decision can be read here.
As mentioned above, both the FTT and UT supported HLT’s position with reference to many decisions of the CJEU, including the decision in 2010 in SKF. A Swedish business sold some of its subsidiary companies as part of a restructuring programme of its (largely taxable) business. It sought to reclaim VAT incurred as input VAT in relation to the costs incurred that directly related to the restructuring project. The Swedish VAT authorities refused the VAT refund claims, and the Swedish courts referred the matter to the CJEU. The CJEU provided guidance around what it considered the appropriate test to be. The CJEU then remitted the case back to the Swedish courts to decide. The CJEU judgment was perhaps, on reflection and with the benefit of hindsight, not particularly clear. It seems that HLT and both Tribunals took the judgement to mean that, provided a business was carrying out a share sale to fundraise to generate onward intended taxable supplies, VAT incurred that although directly relating to a VAT exempt share sale, could be reclaimed. There may be parallels here with the 2005 High Court decision in The Church of England Children’s Society where VAT incurred on fund-raising activities were ‘general overhead’ expenses of the charity and ‘cost components of its broader economic activities and may be recoverable, in full or in part, depending on what activities the funding generated supported (that decision is now superseded by later case law).
Court of Appeal
HMRC finally achieved the victory it sought in 2024 (some 6 years after its VAT assessments were originally issued) when the Court of Appeal (CoA) overturned the decisions of the FTT and the UT. The CoA held HLT could not reclaim the input VAT incurred on the costs directly associated in making a VAT exempt share sale even where the proceeds of that share sale were used exclusively in making taxable supplies and it drew on historic case law when reaching its decision. Our summary of the CoA decision can be read here.
The decision of the CoA was consistent with that in 1995 of the CJEU in BLP Group plc. The circumstances in BLP and HLT are similar, BLP disposed of shares it owned in a subsidiary company, and it was accepted that this disposal was a VAT exempt supply. In BLP the Court held that VAT incurred on costs associated with the share sale was only recoverable to the extent that the services received had a direct and immediate link with taxable transactions. The fact that the aim of BLP was the intention to carry out taxable transactions was irrelevant. The use of the funds generated following the share sale did not matter, VAT incurred that was a direct cost component of the share sale was irrecoverable.
It was noted by the CoA in HLT that the CJEU commentary in SKF was confusing, although the decision does say that there is a right to deduct VAT incurred as input VAT on services received for the purpose of a disposal of shares if there was ‘a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person’. The CoA interpreted the decision in SKF to mean:
- The referring Swedish court thought that SKF’s costs were attributable both to the share sale and its general taxable supplies.
- The CJEU believed that the costs incurred are either attributable to the share sale, and VAT incurred is not recoverable, or the costs are attributable to the general taxable supplies, and VAT incurred is recoverable, but not both.
- On reflection, the reference from the Swedish court did not work. The VAT incurred could not be attributed to both activities/supplies.
The CJEU referred the case back to the Swedish courts to decide whether the costs incurred were directly linked to the share sale or the general taxable business activities of the business.
The CoA concluded that the position has evolved since the decision in BLP some 30 years ago. SKF presents a possible argument that the costs involved in a share sale may not be attributed to that share sale and could be attributable to intended taxable supplies.
Supreme Court
The Supreme Court (SC) upheld the decision of the CoA. In headline terms it concluded that VAT incurred on the share sale was not recoverable even if the primary purpose of the sale of shares was intended to raise funds to support the taxable business activities of the organisation selling shares.
The judgement reviews in detail the cases referenced by the courts in earlier decisions and Frank A Smart a 2019 case about fundraising using Scottish agricultural subsidies, where the SC found for the taxpayer and allowed input VAT recovery.
Conclusion
The decision of the SC is important and naturally will be a disappointing outcome for HLT and other organisations seeking to raise funding via a share sale, or possibly other means. There is not a general “look through” approach that allows attribution of input VAT to a supply that transaction eventually funded, discounting the immediate link to an exempt supply in the first instance. The Court concluded in this case that was not the correct approach.
Turning the SC decision around slightly, what is not clear is when VAT incurred on costs related to a share sale can be attributed to the wider (taxable) business activities of an organisation, rather than being directly and exclusively linked to a VAT exempt share sale. The Court entertained that this is possible in some circumstances but did not elucidate on the facts that permitted that analysis.
As with all matters relating to VAT, transactions are fact specific and thought will need to be given to recovering VAT incurred on costs which, at face value at least, seem to be related to a sale of shares, only. However, reliance on that transaction fundraising to support a taxable activity allowing input VAT recovery is now a more challenging and difficult possibility.
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.