HMRC NEWS

Capital Goods Scheme simplification
The Capital Goods Scheme (CGS) is an input VAT adjustment mechanism that requires businesses and charities to review and adjust the VAT originally reclaimed on certain high-value capital assets over a set period of time to reflect changes in how those assets are used for taxable and VAT exempt business activities or non-business purposes. The newly published policy paper sets out in detail the proposed simplification of the CGS which came into force from 29 July 2026, which can be summarised as follows:

• computers and items of computer equipment will be removed from the list of assets covered by the scheme. The CGS will no longer apply to capital expenditure on computers and items of computer equipment
• the expenditure threshold for land, buildings and civil engineering work will increase from its current value of £250,000 (exclusive of VAT), to £600,000 (exclusive of VAT). This means that the CGS will now only apply to land, buildings and civil engineering works, where the VAT bearing capital expenditure on these assets is £600,000 or more

The changes apply only to capital expenditure incurred on or after 29 July 2026; expenditure incurred before that date remains subject to the existing CGS rules. If you require advice in relation to the CGS, please do not hesitate to contact us.

Revenue and Customs Brief 6 (2026): VAT liability of the supply of temporary medical staff (locum doctors)
In this newly released RCB, HMRC has confirmed that supplies of GMC-registered locum doctors may now qualify for VAT exemption, including where they are supplied through employment businesses, following the Isle of Wight NHS Foundation Trust Tribunal decision. Businesses that have previously charged VAT on qualifying supplies may be able to reclaim overdeclared VAT for the last four years, subject to HMRC’s review and the relevant VAT rules, including partial exemption calculations.

VAT provisions for Deposit Return Schemes (DRS)
HMRC has recently published its first official guidance on the proposed drink Deposit Return Schemes. The measure revises the VAT treatment for the UK’s drinks deposit schemes, due to commence in Autumn 2027, by transferring responsibility for accounting for VAT on unclaimed (unrefunded) container deposits from drinks manufacturers and importers to the relevant scheme administrator. Businesses throughout the supply chain will continue to disregard the deposit element when accounting for VAT on sales, simplifying VAT administration and reducing compliance burdens. The changes will be introduced through the Finance Bill 2026–27, with detailed rules set out in secondary legislation.

Funded pension schemes (VAT Notice 700/17)
This HMRC guidance can be used to find out how to claim input tax on funded pension scheme expenditure for both employers and trustees. Many sections of the notice have been updated. The list of attribution of services incurred in connection with funded pension schemes has been removed. This is potentially a very complex area of VAT, and we would recommend seeking professional advice in cases of ambiguity. Constable VAT has the relevant expertise and experience and would be pleased to assist with any queries.

VAT rates on different goods and services
HMRC guidance has been updated at the ‘Energy-saving materials installed in residential accommodation and certain charitable buildings’ section, with information on which energy-saving materials are subject to a 0% VAT relief until 31 March 2027.

HMRC email updates, videos and webinars for VAT
The above can be used to learn more about VAT including accounting schemes, VAT Returns and keeping records. A recorded webinar about VAT rate reduction during the children’s summer holidays has been added.

VAT treatment of land for social housing
HMRC has recently published its consultation document on introducing a new VAT zero rate for land intended for the construction of social housing across the UK.

Updates on VAT appeals
The above link can be used to check the list of VAT appeals HMRC has lost, or partly lost, that may have implications for other businesses. The list of VAT appeals has been updated with 5 additions, 6 amendments and 4 removals.

Business promotions (VAT Notice 700/7)
Guidance in relation to various VAT schemes on business gifts, samples and promotional schemes, has been updated at Section 6.1 to remove information relating to linked supply concessions for offers such as ‘buy one get one free’ or ‘meal deals’.

CASE REVIEW

Court of Appeal

1. TOMS: Ride-hailing services

HMRC appealed the Upper Tribunal’s decision that Bolt Services UK Limited’s (Bolt) supplies of on-demand mini-cab services fell within the Tour Operator’s Margin Scheme (TOMS). Bolt operates a 24/7 global mobility platform offering transport by private hire vehicles in over 400 cities. Initially, Bolt acted as agent; however, from August 2022 Bolt has acted as principal, contracting with drivers for their services, and separately with customers. If the normal VAT rules applied, Bolt would be required to charge VAT on the entire fare; however, by using the TOMS, Bolt would only account for VAT on its margin. In October 2022, Bolt applied for a Non-Statutory Clearance (NSC) ruling; however, HMRC rejected Bolt’s argument that TOMS applied. Bolt appealed to the FTT which allowed the appeal and the UT subsequently upheld the decision of the FTT.

HMRC appealed the UT’s decision to the Court of Appeal on the following grounds:

• Ground 1: The UT erred in holding that a broad, high level approach was required to decide whether supplies fell within TOMS.
• Ground 2: The UT erred in concluding that the driver’s supplies to Bolt were not ‘materially altered or further processed’ by Bolt and that Bolt’s supplies to its customers were not ‘in-house’ supplies.

HMRC’s core argument under Ground 1 challenged the FTT and UT’s ‘high-level’ approach, highlighting that TOMS does not apply to the transport sector generally, but provides an exception from the normal rules aimed at the activities of travel agents and tour operators. HMRC argued that Bolt’s supplies are neither identical nor comparable to those of travel agents or tour operators. Bolt sought to uphold the UT’s approach, particularly that the touchstone of TOMS is ‘travel’ not only holidays or tourism and it is not restricted to ‘traditional travel’, but it can also be local and its purpose irrelevant.

After an extensive review of case law, the Court of Appeal has agreed with HMRC’s approach that when considering the application of TOMS, the question is whether the supply is identical or at least comparable to the supplies of tour operators and travel agents. The Court had little difficulty in reaching a conclusion on that basis as it stated the following:

“Bolt failed to secure a finding from the FTT that travel agents and tour operators provide the same or similar services to Bolt’s on-demand minicab supplies. That is, with respect, obvious. The ordinary meanings of travel agent and tour operator, and the kinds of supply they make and the ways in which they make them, have moved with the times  but no one can seriously suggest that travel agents and tour operators offer on-demand minicab rides, or anything comparable to them, whether through apps or otherwise.”

On that basis, the Court found in HMRC’s favour and remade the decision, concluding that the supplies made by Bolt do not fall within TOMS. Given the conclusion on Ground 1, it was not necessary for the Court to determine HMRC’s arguments under Ground 2.

Constable VAT Comment: This is an interesting turning point in the long disputed case whether ride-hailing services fall within the scope of TOMS. For the first time, the Courts concluded that it does not. According to the recent decision, Bolt’s appeal involves an estimated £190million, and other cases with sums well in excess of £1billion were awaiting the outcome of this decision. Given the substantial amounts involved, we believe it likely that Bolt will pursue this matter to the Supreme Court, which will be able to deliver the final binding decision on this issue and put the matter to rest.

2. Alternative providers (APs) of higher education

In the recent St Patrick’s International College & Ors Ltd v HMRC, the Court of Appeal considered whether supplies of higher education made by three Alternative Providers (APs) should have been exempt from VAT during the relevant pre-Brexit period. Although the providers were not “eligible bodies” under UK legislation, they argued that the UK’s implementation of Article 132(1)(i) of the Principal VAT Directive was incompatible with the EU principle of fiscal neutrality because equivalent higher education supplied by universities and other recognised institutions qualified for VAT exemption.

The Court allowed the appeal, holding that it was bound by its earlier decision in LIFE [2020] EWCA Civ 452, which established that fiscal neutrality must be assessed from the perspective of the typical consumer. Applying that approach, the Court concluded that the higher education courses supplied by the APs were materially indistinguishable from those offered by universities and other eligible bodies and met the same needs of students. The Court found that excluding the APs from the VAT exemption breached the principle of fiscal neutrality.

Constable VAT Comment: The decision represents a significant development for the private higher education sector; however, the judgment is based on the direct effect of EU law and the principle of fiscal neutrality, both of which have limited application following the UK’s withdrawal from the EU. The Court also observed that HMRC had advanced persuasive arguments on the underlying merits, meaning a further appeal to the Supreme Court remains a realistic possibility.

Upper Tribunal

3. VAT Zero rating – relevant residential purpose building

In the case of NHS Ayrshire and Arran Health Board (NHS Ayrshire) the Upper Tribunal (UT) considered the construction of a ‘bedroom wing’ within the National Secure Adolescent Inpatient Service (NSAIS) which is a medium‑secure inpatient mental health facility, within the grounds of Ayrshire Central Hospital. The issue at hand is whether the construction services and materials used for the bedroom wing can qualify for zero rating under Item 2, Group 5, Schedule 8 of VATA 1994, as a relevant residential purpose (RRP) building. Initially NHS Ayrshire sought a Non-Statutory Clearance (NSC) from HMRC who concluded the supplies are standard rated. The decision was appealed but the First Tier Tribunal (FTT) agreed, our summary of the FTT decision can be read here.

The UT granted NHS Ayrshire permission to appeal on three grounds and addressed each of these in its latest decision. First the UT addressed NHS Ayrshire’s argument (Ground 1) that the FTT erred in law concluding that the bedroom wing is an integral and inextricable part of a building, which is a hospital or similar institution and used as such, meaning it cannot be a ‘a part of a building’ for the purpose of Note (10) and subject to an apportionment. The UT had no difficulty in dismissing this argument, highlighting that on any fair reading of the FTT Decision as a whole, the FTT clearly applies the relevant tests to the bedroom wing, treating it as a separate part of the NSAIS complex.

The UT then turned to NHS Ayrshire arguments that the FTT erred in law by concluding that the bedroom wing was not a RRP building as per Note 4 (Ground 2), or that it erred in concluding that the bedroom wing was ‘used as a hospital’ (Ground 3).

The UT has upheld the FTT’s decision finding that the correct test was the intended use of the bedroom wing, rather than simply whether it could be physically identified as a separate part of the building. Although the wing contained patients’ bedrooms, it was inextricably linked to the delivery of medical treatment throughout the facility.

Patients were subject to continuous observation by qualified mental health nurses, whose monitoring formed part of their treatment, and the bedroom wing was designed to support the therapeutic regime (Use as a hospital) rather than provide independent residential accommodation (Note 4). The Tribunal also noted that patients did not live there in the ordinary residential sense, as meals, visits and most daily activities took place elsewhere within the NSAIS complex.

Accordingly, the Tribunal concluded that the bedroom wing formed part of a hospital rather than a building used for a RRP. The appeal was dismissed.

Constable VAT Comment: This is an interesting case highlighting the fact that the intended use of a building is often crucial when determining ‘relevant residential purpose’ (RRP) for zero rating purposes, and anyone in the construction industry sector dealing with RRP’s will find this decision particularly helpful. The case also acts as a useful reminder of the complexities involved with the zero-rating provisions for construction services. It is not surprising the entire debate commenced as an NSC, demonstrating that some cases are often ambiguous and the legislation may be open to interpretation by taxpayers, advisors and HMRC.

4. VAT treatment of Invisalign clear aligners

Align Technology Switzerland GmbH and Align Technology BV (Align) treated supplies of Invisalign clear aligners as VAT exempt on the basis the aligners are dental prostheses. HMRC issued decisions that supplies of the aligners are subject to VAT at the standard rate. Align appealed to the First Tier Tribunal (FTT) which allowed its appeal.

HMRC appealed the FTT’s decision to the Upper Tribunal (UT) on the basis that the FTT erred in its interpretation of ‘dental prostheses’. The UT agreed with HMRC and have allowed HMRC’s appeal, reversing the decision of the FTT. Supplies of Invisalign clear aligners are subject to VAT at the standard rate.

There is no definition of ‘dental prostheses’ in the EU or UK VAT legislation or case law. Where a term is undefined in VAT legislation its meaning is determined by considering its usual meaning in everyday language while also recognising the context in which the term is used in legislation and the purpose of the rules in question.

The UT first considered the purpose of the VAT exemption for supplies of dental prostheses by dentists and dental technicians. Referring to case law, the purpose of the exemption in question is to ensure the supply of health-related products does not become inaccessible by reason of increased cost if the supply was subject to VAT.

The UT consulted various dictionaries to assist with the meaning of ‘dental prostheses’, case law (the available case law was not VAT related) and an EU VAT Committee Guidelines and Working Paper. The UT concluded that ‘dental prostheses’ means an artificial item which replaces missing or damaged teeth. This does not extend to dental devices such as the Invisalign clear aligners which are removable orthodontic appliances to treat malocclusion in patients by repositioning their teeth.

Constable VAT comment: Whilst the conclusion of this decision is unlikely to impact many businesses directly, the Tribunal’s decision sets out the approach that should be taken to establish the meaning of terms used within the law when they are not explicitly defined in the VAT legislation in question. Unfortunately, this is fairly common and can often lead to ambiguity for taxpayers. In cases of ambiguity, and where materials sums of VAT are involved, we would always recommend seeking professional advice.

First tier Tribunal

5. Temporary reduced rate of VAT

During the Covid-19 pandemic, the UK government introduced a temporary reduced rate of VAT for hospitality, holiday accommodation and attractions. The First Tier Tribunal (FTT) has recently heard two cases on the application of this temporary reduced rate of VAT.

The temporary reduced rate of VAT introduced during the pandemic applied to:

“supplies of a right of admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions and similar cultural events and facilities…”

Hire of private karaoke rooms

One of the cases, Lucky Voice Group Ltd, concerned whether the temporary reduced rate of VAT applied to the hire of private karaoke rooms. Lucky Voice took the view that the reduced rate of VAT applied to its supplies and submitted error correction notifications claiming a refund of overpaid VAT from HMRC in the sum £262,152.66.

The main issue in dispute was whether Lucky Voice’s supply is a ‘right of admission’ to a ‘similar cultural facility’ to ‘shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions.’

Lucky Voice operates a per-head pricing model; however, the FTT did not find that the fee charged to customers is for admission. Lucky Voice’s appeal failed on the basis of this finding. The contractual arrangements refer to “room bookings” and “room hire” which points to the supply being for exclusive use of the private karaoke room rather than admission. The tribunal found that the customers receive something over and above the right to access the karaoke room, they receive the exclusive use of the room and equipment in that room.

Despite the appeal failing at the first hurdle, the FTT went on to consider other points raised in case it was wrong on the admission point.

The FTT did not consider the supply of private karaoke rooms to be similar to ‘shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions’, but highlighting that it might have reached a different finding on this point if the supply had been of a public karaoke rather than a private room. The Tribunal commented that Lucky Voice’s grounds of appeal based on fiscal neutrality and unfairness must fail.

David Lloyd memberships

The case concerned Next Generation Clubs Ltd, the representative member of a VAT group registration whose members operate leisure and recreational facilities under the David Lloyd and Harbour Club brands. The company submitted an error correction notification seeking repayment of output VAT on membership subscriptions, arguing that the temporary reduced rate of VAT applied.

The issue before the FTT was whether the membership subscriptions constituted rights of admission to similar cultural events or facilities, such as shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, and exhibitions.

David Lloyd clubs provided a range of facilities including swimming pools, gyms, exercise studios, sports courts, spas, creches, children’s areas, co-working spaces, and organised events. The FTT considered whether these facilities were sufficiently similar to any of the listed qualifying activities, particularly amusement parks. It concluded that they were not, as the average consumer would not view a David Lloyd club as meeting the same needs as an amusement park.

The FTT then considered whether the clubs shared the common characteristics of the qualifying events and facilities. It rejected the appellant’s argument that the defining feature was simply that they were recreational activities bringing people together for leisure purposes. Instead, it found that the qualifying activities shared further characteristics: they provided an experience that was the main attraction and were designed to be extraordinary rather than part of everyday life.

The Tribunal found that the clubs did not have a single main attraction due to the wide range of facilities offered, and that their purpose was to form part of members’ ordinary daily routines rather than provide an extraordinary experience. Accordingly, the FTT held that the supplies were not similar to the qualifying cultural events and facilities and were therefore not eligible for the temporary reduced rate of VAT.

Although this finding was sufficient to dismiss the appeal, the FTT also considered whether the subscriptions represented a right of admission. It concluded that membership did constitute a right of access to the David Lloyd sites and therefore functioned as a right of admission.

 Constable VAT comment: Although these cases refer to the temporary reduced rate of VAT that applied to admission to cultural events and facilities made between 15 July 2020 and 31 March 2022 the discussions and findings of the Tribunal may also be relevant to charities operating venues, sites, events or performances of a cultural nature, that may qualify for the VAT exemption for admission to cultural events and also the temporary reduced rate of VAT for family attractions in place between 25 June and 1 September 2026.

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.

HMRC NEWS

Revenue and Customs Brief 5 (2026): Temporary reduced rate of VAT for children’s meals, tickets and family attractions
The government has recently announced a temporary reduction in the rate of VAT from 20% to 5% on selected family-focused activities during the 2026 summer holidays. From 25 June to 1 September 2026, the reduced rate VAT (5%) will apply to:

• Children’s meals eaten in restaurants, cafés and similar establishments
• Children’s cinema, theatre, concert and exhibition tickets
• Admission to many family attractions including theme parks, zoos, museums, water parks and soft play centres etc.

Family tickets that include children may also qualify. The relief only applies to qualifying children’s or family-focused offers, while extras such as merchandise, upgrades and most adult-only tickets remain subject to the standard VAT rate.

There are some further details and conditions to consider before applying the reduced rate VAT to any supplies. If you or your business requires advice, please do not hesitate to contact Constable VAT and we would be pleased to assist.

Tell HMRC about an option to tax on property as part of cancelling your VAT registration
When a business deregisters from VAT and retains a property which has been opted to tax previously, there are further VAT implications to consider. The above guidance provides details of how to tell HMRC about an option to tax on land and buildings as part of cancelling a VAT registration. The guidance has been updated to confirm that VAT will become chargeable, rather than may become chargeable, in specific circumstances. This is potentially a very complex area of VAT and in cases of ambiguity we would recommend seeking professional VAT advice.

Food processing services (VAT Notice 701/40)
The above guidance, in relation to the VAT rules concerning food processing and abattoir services, has been updated at Section 5 and 6 to explain how Agriculture and Horticulture Development Board levies are treated in respect of VAT from 1 April 2022. It has taken HMRC some time (several years) to update this guidance which was updated on 13 May 2026 but takes retroactive effect for a period of over 4 years.

Business entertainment (VAT Notice 700/65)
The above sets out how to account for VAT on entertainment provided by a business. HMRC has recently updated the ‘business entertainment’ section to confirm persons who are and are not employees for the purpose of business entertainment.

Understanding your monthly postponed import VAT statements
This guidance can be used to find out how to understand and use the information on monthly statements, if a business uses postponed VAT accounting to account for import VAT. HMRC has now added information about issues with duplicated entries.

Get your import VAT certificate (C79)
This guidance can be used to find out how to get import VAT certificates (C79), if you have paid import VAT using a duty deferment account. Information about when an import VAT certificate (C79) will be available has been added by HMRC in its recent update.

CASE REVIEW

Upper Tribunal

Single or multiple supply: Dip pots

The Upper Tribunal (UT) in Queenscourt Limited v HMRC considered whether dip pots supplied in KFC takeaway meal deals were separate zero rated supplies or part of a single standard rated supply of hot food. Queenscourt originally treated dip pots as part of a single standard rated takeaway meal; however, in 2019 it submitted a VAT accounting error correction notice (ECN) on the basis that the meal deals were a multiple supply, so where appropriate, component parts such as coleslaw, cookies, yoghurts and dip pots etc, could be zero rated. HMRC agreed and repaid the overdeclared output VAT claimed.

On the same basis, in 2020, Queenscourt submitted a further ECN for more recent VAT periods. This was reviewed by another HMRC officer who took the alternative view that dip pots are ancillary to the supply of hot food and constitute a single supply (hot food and dip pot) within a multiple supply of a meal deal (also including zero rated cookies, coleslaw etc). The officer refused the claim and issued VAT assessments to recover the output VAT HMRC had previously refunded.

Queenscourt appealed these decisions to the First-tier Tax Tribunal (FTT); however, the FTT agreed with HMRC concluding that dip pots formed part of a single standard rated supply because they were ancillary to the hot food supplied and simply enhanced the customer’s enjoyment of it. The FTT believed that a meal deal could contain both:

• Separate supplies for some items (cookies, coleslaw, yoghurts etc)
• A single composite supply for other items (hot food and dips)

Queenscourt appealed the FTT’s decision to the UT on the grounds that the decision was flawed because VAT law requires a binary approach, i.e.

• Either the entire transaction is a single composite supply, or
• Each component is taxed separately (multiple supply)

The appellant’s view was that HMRC could not selectively combine only certain elements of the meal deal, whilst simultaneously treating others as a separate supply.

Following an extensive review of case law, the UT agreed with Queenscourt stating that a supply must either be a single supply, with a single VAT liability, or a multiple supply, with each element in a multi-element transaction being considered separately, with its own VAT liability. The UT concluded that HMRC could not isolate selected elements within a wider multiple supply and treat only those items as a single composite supply. As HMRC had already accepted that other meal deal items were separate supplies, the dip pots also had to be treated separately and therefore remained zero rated. The appeal was allowed.

Queenscourt also made arguments around legitimate expectations, claiming that it was not reasonable for HMRC to revisit previous decisions, i.e. the earlier error correction being processed and refunded; however, given the conclusion of the VAT liability issue, it was not necessary for the UT to address this and left the question to be considered in another case by another Court which has full submissions and the issue would make a difference to the outcome of that appeal.

Constable VAT Comment: Whilst this is another interesting case within the food industry, the underlying VAT issue was not one of the VAT liability of the food item itself, but rather a question of a single or multiple supply, which in turn determines whether the food item was zero rated or not. Perhaps a welcome change to the exceptional amounts of recent case law on VAT liability of food items. The decision is certainly interesting with the UT overturning the FTT’s decision, concluding that where a meal deal supply is accepted as a multiple supply, the decision is final and it is not open to HMRC or taxpayers to ‘pick and choose’ which elements within the overall supply is a single or multiple supply. Instead, all components of that multiple supply will have its distinct VAT liability. Therefore, even if a dip may not constitute a significant aim in itself and it is a means of better enjoying the hot food, if it forms part of a multiple supply meal deal, the dip will be a zero rated food item. This decision may have a significant impact on the fast-food sector and others, and it will be interesting to see whether HMRC appeals this decision to the Court of Appeal. HMRC appears to have conflated various points in this case and the taxpayer suffered from being between an apparent disagreement as to the VAT liability of a supply by two different HMRC officers. It is not unreasonable to expect HMRC to have a clear policy that is consistently applied in this regard, and, presumably, the officer authorising the first ECN would have had to justify the reason for the VAT refund to a line manager. A different officer, and presumably senior colleagues, drawing a different conclusion in relation to the second ECN makes the position very difficult for taxpayers who desire certainty and equitable treatment. Businesses may want to consider submission of protective VAT refund claims whilst HMRC reflects on this decision.      

VAT Grouping

In  Barclays Services Corporation & Anor  [2026] UKUT 211 (TCC) the question of eligibility to join a VAT group and to enjoy the benefits of UK VAT grouping have been revisited following its appeal of HMRC’s rejection of an application to VAT group being dismissed at the FTT.

The facts in summary were that:

• Barclays Executions Services Ltd (BESL) is the representative member of a UK VAT Group.
• Barclays Services Corporation (BSC) is USA company established in Delaware in the USA.
• BSC has a branch in the UK registered with Companies House.
• BESL applied for BSC to join the UK VAT Group.
• The UK VAT grouping rules apply a “whole establishment” or “whole entity” principle. This means that eligibility for grouping extends to a body corporate which is not resident in the UK, but which has a fixed establishment in the UK.
• If HMRC were to accept the application by BESL and BSC for BSC to join the VAT group of which BESL is the representative member, grouping would extend not only to transactions between VAT group members and the UK branch but also between VAT group members and BSC.
• Where taxable supplies of services are made to the partly exempt VAT group by BSC, these are treated as within the VAT group disregard. That means that a reverse charge that would produce significant irrecoverable VAT for the UK VAT group on purchases of cross border services from BSC would not apply.

HMRC sought two lines of argument to persuade the Tribunal that it was correct to deny BESL and BSC the right to be VAT grouped, either that BSC had no fixed establishment in the UK at the time it tried to VAT group or the protection of the revenue powers afforded to HMRC by Section 43B(5)c would apply. A further argument was made, somewhat at odds with HMRCs published views and UK legislation, that the principles of Danske Bank A/S (C-812/19) should apply and, that if VAT grouped, cross border supplies from the branch into the VAT group should be recognised in any case with no VAT grouping benefit to be enjoyed by the business.

1 – Danske Bank

The UTT commenced its deliberation with the Danske Bank argument put by HMRC. In very summary terms, Danske Bank A/S (Danske) was a Danish bank headquartered in Copenhagen but operating in Sweden through a branch. The CJEU concluded that that the Danish VAT grouped head office is a separate taxable person to its Swedish branch. Denmark does not apply whole entity VAT grouping and being VAT grouped was sufficient for the services provided by the head office to the branch to not fall within the disregard for VAT grouped parties or as an intra-entity supply outside the scope of VAT.

HMRC pursuing Danske Bank argument was a difficult path to follow and given short shrift by the UTT. Essentially, HMRC was arguing in contradiction to UK VAT legislation at Section 43A of the VAT Act that expressly provides for whole entity VAT grouping and in direct contradiction to HMRC’s Business Briefs following the Skandia VAT case in 2015 and again in 2025.

This argument was dismissed by the UTT.

2 – The Fixed Establishment point

BSC had little substantive presence in the UK albeit a branch was registered with Companies House. HMRC concluded that it did not have sufficient presence in the UK to be considered a fixed establishment for VAT purposes and the FTT concurred with the absence of sufficient technical and human resource at the time of grouping to constitute a fixed establishment.

The business argued that sufficient resource was present to make a meaningful commercial contribution to the business operation of BSC at the branch location. Arguments were made around “comparable control” i.e. an entity does not need its own human and technical resource if it has comparable control of the resource provided by others and these are contracted such that they cannot be terminated at short notice.

The comparable control test was applied to certain persons later employed by the UK branch but controlled and at the disposal of it. The UTT noted that the vast majority of the time spent (in the taxpayers own words) by principal named persons was not actually for the UK branch. This was a significant flaw in the argument that human resource was sufficiently present for a fixed establishment. That person also was managed by a person who themselves was not employed by the UK branch. An intending trader analogy was made but the UTT could see no authority for that to be sufficient in terms of the fixed establishment point.

The UTT conclude that there was no UK branch fixed establishment hence there was no legal basis for the UK branch to VAT group.

3 – Protection of the revenue powers

Given that the fixed establishment point was determined against the taxpayer, consideration of this issue was academic albeit it was the alternative reason set out by HMRC for refusal to allow VAT grouping.

The UTT concluded that there would have been a reasonable basis for HMRC to refuse VAT grouping for protection of the revenue. The skeletal at best resource of the branch with no meaningful human or technical resource plus the “financial imperative” mentioned by the business to get the arrangements in place for the tax savings as soon as possible, the UTT thought indicated a revenue risk and it was indicated that this alternative argument would have been accepted for it to be correct that HMRC did not allow VAT grouping.

Constable VAT comment: Financial service and insurance businesses often operate internationally and across borders within a corporate group. For various regimes economic substance is an important factor and similar principles are a marked issue for the VAT place of establishment and place of supply rules. Commercial arrangements must be robust and documented where the place of supply or establishment is critical to a VAT analysis. HMRC may scrutinise arrangements and the analysis must be rational, logical and substantive to avoid difficult VAT scenarios.

First-tier Tax Tribunal

VAT: Online marketplaces

In HBS Enterprises Limited (HBS) HMRC raised VAT assessments that were, ultimately, found to be calculated incorrectly. HBS sells goods via an online marketplace, and it is accepted that where a business that is not established in the UK supplies goods via an online marketplace in the UK that the online retailer or marketplace accounts to HMRC for output VAT.

In this case Amazon mistakenly classified HBS as a non-established taxable person (NETP) for a period and accounted for output VAT on HBS’ supplies. Amazon deducted the output VAT it had paid to HMRC from the sums it passed to HBS. This only happened in relation to some Amazon transactions (not all) between September 2023 and February 2024 and it seems that the most likely explanation for this is that when using the HMRC ‘check a VAT number’ facility HBS had a registered address at HMRC’s office at Ruby House, Aberdeen, suggesting NETP status.

HMRC considered the supplies to be domestic supplies by HBS and subject to UK VAT at the standard rate. It is HBS’ responsibility to account for output tax due. HMRC raised VAT assessments for underdeclared output VAT (allocated to VAT accounting periods using non-standard VAT accounting period dates) as follows:

05/23 £3,621.49 (date range 27 February 2023 to 3 June 2023)

08/23 £9,154.56 (date range 3 June 2023 to 4 September 2023)

11/23 £5,405.56 (date range 4 September 2023 to 5 February 2024)

02/24 £581.76 (date range 5 February 2024 to 4 March 2024)

Total £ 18,763.37

HBS requested an independent HMRC review of the VAT assessments and that decision was upheld and an appeal was lodged.

The Tribunal decision is very long and includes a lot of references to how Amazon collects VAT accounting data; however, the Tribunal found flaws in HMRC’s VAT assessments, which the taxpayer had also identified. There was some double counting on HMRC’s part. HMRC’s calculations took no account of the fact that it was not all Amazon transactions that were recorded in error, output VAT had been accounted for on some supplies, and HMRC had overlooked that some supplies were zero-rated exports.

Because HBS is established in the UK it remains its responsibility to account for VAT correctly, even in a situation where Amazon may have accounted for VAT in error. The Tribunal explained that its responsibility was limited to determining the correct VAT liability of HBS’ supplies. The Tribunal found that VAT was due on some of HBS’s supplies and although Amazon had already accounted for VAT on some supplies, this did not affect the position in law.

At paragraphs 65 of the decision the Tribunal noted ‘We appreciate that the Appellant may think this conclusion is unfair. However, our jurisdiction in this appeal is to determine the correct amount of tax payable by the Appellant. The proper legal position in our judgment is that as the relevant supplies were undertaken by the Appellant as a taxable person registered in the UK, the correct analysis is that the Appellant has to account for output tax on those supplies, irrespective of the mistaken treatment of the same by Amazon’.

Having reviewed the evidence in detail the Tribunal found that HMRC’s assessments required amendment as follows:

05/23 – VAT assessment set aside in its entirety.

08/23 – VAT assessment varied such that output VAT assessed is set aside but £702 input VAT disallowed.

11/23 – VAT assessment is varied and parties seek to agree output VAT due.

02/24 – VAT assessment is varied and parties seek to agree output VAT due.

Constable VAT comment: This decision raises concern with HMRC’s approach when dealing with litigation. The four VAT assessments raised were clearly incorrect with multiple errors made on HMRC’s part. The assessing officer failed to consider output VAT already declared by HBS on its VAT returns in relation to standard rated Amazon supplies. No account was taken of zero-rated supplies, and there were inaccuracies in the date range applied to each VAT accounting period when raising the VAT assessments. For example, the VAT assessment in respect of the VAT accounting period 11/23 covers the dates 4 September 2023 to 5 February 2024 and includes a full two months of transactions after the end of the VAT accounting period. Our assumption is that the assessing HMRC officer would have been required to have the figures prepared checked by a colleague or line manager before VAT assessments were issued. Similarly, once HBS requested an independent review of the decision to raise VAT assessments we would reasonably expect the reviewing officer from HMRC SOLS office to scrutinise the figures presented in detail to ensure that these were accurate and that VAT accounting period end dates aligned. There is no explanation in the decision as to why the assessing officer believed the 11/23 VAT accounting period extended to 5 February 2024. When asked, HMRC’s litigator was unable to explain to the Tribunal precisely how the VAT assessments were calculated, even with the assistance of the HMRC officer who raised the VAT assessments, and who attended the hearing and gave evidence. From reading the decision, HMRC’s VAT assessment of £18.7k will, at best be £5.7k, a reduction of approximately 70%. It would be interesting to know the total cost to HMRC of taking this case, the cost of the Tribunal’s time and no doubt HBS has incurred significant cost in terms of its own resource in dealing with this matter.

This decision also serves as a reminder to marketplace sellers to ensure that the details held by marketplaces are correct.

Status of appeal

In J&T Goods Limited (J&T) the position can be summarised as follows:

• The taxpayer submitted its VAT return in respect of the VAT accounting period 10/24 which recorded input VAT of £38,911.
• On 18 July 2025 HMRC reduced the input VAT claimed on that VAT return by over 97%, to just £878. The reasons for this are not explained in the decision.
• J&T requested an independent review of HMRC’s decision to amend the input VAT figure shown on its 10/24 VAT return.
• On 25 September 2025 HMRC upheld the decision to amend the 10/24 VAT return.
• J&T lodged an appeal with the First-tier Tax Tribunal (FTT).
• On 12 February 2026 HMRC wrote to the FTT advising that it did not intend to defend the appeal and invited the FTT to close its file.
• A week later J&T applied to proceed to a full hearing of the FTT.
• HMRC wrote to the FTT on 31 March 2026 confirming that the decision under appeal has been withdrawn and that there is no longer an appealable matter before the FTT.

The FTT found that HMRC’s decision of 18 July 2025 was withdrawn. It follows that there is not a decision which can be appealed. The FTT refused to accept that the hearing should proceed as if the decision remains but is not defended by HMRC.

The FTT also disagreed with J&T that because HMRC withdrew its decision that means the input VAT reclaimed is payable to J&T. The FTT commented “withdrawal of a decision does not constitute a determination that the taxpayer’s position is correct. It simply removes the existing decision. Any future entitlement will depend on further consideration by HMRC and, if appropriate, a further appealable decision.”

Constable VAT comment: Whilst we do not have full facts about the case, only the limited commentary in the FTT decision, this appears to be an unusual situation whereby HMRC has refused a business credit for input VAT, given an appealable decision, withdrawn that decision but continued to deny the taxpayer the right to the input VAT it claimed on its VAT return. We do not know whether HMRC has issued a new appealable decision. It is interesting to note that this decision has been released very shortly after that in Join Her Limited (15 May 2026). In that case HMRC behaved similarly, refusing input VAT claims, then withdrawing an appealable decision, and issuing new appealable decisions once the Tribunal process was underway. It remains to be seen whether there will be more cases of HMRC using this tactic and costing taxpayers’ unnecessary funds, not only those directly involved in the dispute but the wider taxpayer base funding the cost of HMRC withdrawing and reissuing decisions and taking the time of the Tribunal.     

Tribunal Appeals: Costs

Readers may recall the decision in Athena Luxe Limited (Athena) released in December last year. It concerned the taxpayers right to reclaim input VAT in the absence of tax invoices but with alternative evidence that demonstrates goods were purchased to make onward taxable supplies.

Following its successful appeal Athena Luxe Limited made an application for costs in the sum £11.5k. HMRC accepted liability for Athena’s “reasonable and proportionate costs in this matter”. HMRC offered £6k claiming that the sum claimed was disproportionate, bearing in mind that the VAT at stake was just over £15k. The FTT directed that HMRC should pay Athena £9.5k, the Tribunal noting ‘somewhat disappointingly, despite the offer by HMRC, the parties were unable to resolve the costs issue between them’. The matter was determined on the papers rather than a hearing.

Constable VAT comment: This case is a reminder that whilst HMRC is not usually obligated to pay a taxpayers costs following a successful appeal before the FTT, it is sometimes worth considering pursuing costs claim against HMRC, balanced against the cost and resource of doing so.

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.

HMRC NEWS

Revenue and Customs Brief 4 (2026): VAT liability of supplies of electricity from public electric vehicle charge points
In the recent First Tier Tribunal decision, Charge My Street Limited, the Tribunal found that reduced rate VAT (5%) may apply where electricity for vehicle charging is supplied to an identified person at identifiable premises, such as public car parks, provided usage does not exceed 1,000 kWh per month, and clarified that the premises do not need to be owned, controlled, or even be buildings. Our summary of the decision can be read here. HMRC has now released a new brief to confirm that it has applied to appeal the decision and maintains its current policy that electricity supplied at public EV charge points remains subject to the standard VAT rate.

How VAT affects charities (VAT Notice 701/1)
The above guidance can be used to find supporting information in relation to VAT and charities. The guidance was recently updated (at section 5.5) to cover the new VAT relief, coming into effect from 1 April 2026, for VAT registered businesses donating goods. This is a welcome change and we are pleased to say that Constable VAT Consultancy was one of the organisations directly involved in discussions with HMRC and the Treasury around this new VAT relief. We have released further comments around this which can be read here.

Check if you can register to act as an intermediary for the VAT Import One Stop Shop scheme
From 1 April 2026, UK VAT registered businesses can now register as an intermediary for the VAT Import One Stop Shop (IOSS) scheme. Further information is available in the guidance above.

Get help with using VAT online services
HMRC has recently published the above containing useful information to assist taxpayers to find out how to access guidance and videos to help with various VAT online services and the online VAT account.

Updates on VAT appeals
The above link can be used to check the list of VAT appeals that HMRC has lost, or partly lost, that could have implications for other businesses. The list of appeals has now been updated with 2 additions, 7 amendments and 6 removals.

CASE REVIEW

Court of Appeal

1. Further education is a business activity

The Court of Appeal (CoA) has held that grant funding received by Colchester Institute Corporation (the Institute) from government (Skills Funding Agency [SFA] and Education Funding Agency [EFA]) is consideration for VAT purposes, payment for supplying education and vocational training services to young people, a VAT exempt business activity when those services are supplied by an ‘eligible body’.

Taking a step back, the Institute, recovered VAT it incurred on building works. HMRC believed that VAT accounting adjustments were required under the Lennartz principles, deemed output VAT charge in relation to the Institute’s non-business activities. The Institute revisited the position (it had previously made the adjustments) and sought a VAT refund claim of overdeclared output VAT between 2010 and 2014 on the basis that its supplies of education and vocational training is a business activity and the funding it receives is payment for the delivery of those supplies.

The issue for the CoA to consider, in headline terms, was whether there is a nexus between the supplies of education and vocational training the Institute provides, and the funding it receives. On this direct link point, HMRC argued that an immediate link between the funding received by the Institute and the benefit derived by an individual student was absent. HMRC noted that when the funding was applied for and received, the identity of students who would attend the courses was not known, and this meant that the funding could not be consideration in relation to supplies to the student.

The Institute’s position was that scrutiny of the funding arrangements made it clear that funding was awarded in return for supplying education to students. The fact that funding was not calculated and paid in relation to each individual student and course did not impact the economic reality of the position. On the student identity point, once enrolled and study began, funders were notified of who was studying a course or subject.

The CoA reviewed the contractual arrangements between the parties. These agreements are supportive of the Institute’s argument that it was receiving funding in return for supplying educational services of approved courses to students. It is interesting to note that the funding agreements included a clawback provision such that should the number of students anticipated not materialise, sums would be due to be repaid to the funders.

The CoA held that, in the case of the Institute, the requirement that a direct link between the funding received and the supply of education and vocational training was met.

Constable VAT comment: The VAT liability of grant funding received and whether that income represents consideration for a supply, for VAT purposes, must be carefully analysed in relation to the facts on a case-by-case basis. There are material VAT implications to whether grant funding received is outside the scope of VAT or consideration for a supply of services. As arrangements with the funding bodies in this case (SFA and EFA) is uniform, the decision of the CoA would, we would reasonably expect, apply to other organisations receiving income from these funders. The wider impact of this decision will require some thought.

In headline terms, grant funding is often outside the scope of VAT; however, if the recipient of the funding is required to supply goods or services to receive sums the position may change. There is also the added complexity of third-party consideration. The Institute has argued that the grants it received represented consideration for its VAT exempt supplies of education and vocational training, beneficial in this case as its supplies were not outside the scope of VAT and therefore a Lennartz adjustment was not triggered. However, if a grant is consideration and not outside the scope of VAT, this may mean that charities, for example, must treat sums received as VAT inclusive and account for output VAT on sums received, if the funder is not prepared to pay an additional 20%. There could also be implications for academies and those charities intending to use or construct a property for use for a relevant charitable purpose (RCP).

HMRC has issued limited updated guidance confirming the Commissioners do not intend to appeal the decision and intend to consult with stakeholders. The brief can be read here.

Upper Tribunal

2. Boehringer Ingelheim: VAT and price rebates

HMRC appealed against a decision of the First-tier Tribunal (FTT) in which the FTT allowed Boehringer Ingelheim Limited’s (BIL) claims to recover output tax accounted for on supplies of pharmaceuticals for which it was held there had been a post supply price reduction.

BIL supplies pharmaceutical products to the NHS. Those supplies are made either directly to NHS healthcare services providers (HSPs) and pharmacies; or indirectly through wholesalers. These sales are liable to VAT at the standard rate. Similarly, sales by Wholesalers to HSPs and Pharmacies will also be standard rated. The products will either be used by HSPs in connection with “free at the point of use” NHS services in a hospital setting or dispensed for home use by patients by pharmacies. Where used in a hospital setting, there is no supply for VAT purposes. Where dispensed for a fee the supply made is zero-rated.

The Secretary of State may impose or permit schemes limiting price and/or profit or to otherwise manage the cost of pharmaceutical products purchased for and used by the NHS. In the period subject to this appeal, there were two voluntary schemes: the Pharmaceutical Price Regulation Scheme (PPRS) and the Voluntary Scheme for Branded Medicines Pricing and Access (VPAS). As the Department of Health and Social Care was responsible for ultimately funding the NHS, BIL made significant payments to the DHSC in accordance with the affordability mechanism set by these schemes. BIL considered that these payments represented a price rebate amounting to a refund of consideration on earlier supplies made and sought to reclaim output VAT of £21,488,166.66.

The FTT held that the payments made to the DHSC reduced the taxable amount of BIL’s supplies on the basis that DHSC functioned as the economic final consumer having ultimately borne the cost of the medicines through its funding of the NHS.

HMRC appealed to the UT on the grounds that the payments made by BIL fell outside the scope of Article 90 of the Principal VAT Directive (PVD). Article 90 provides that “where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly”. HMRC argued that the payments did not relate to any identifiable supply of medicines but rather operated as a general levy on revenue, akin to a profit regulating mechanism in the event that the FTT was correct to hold that Article 90 applied, it was incorrect to determine that a post supply adjustment was possible where the supply into final consumption was zero-rated for VAT purposes.

Whilst the UT agreed with the FTT that there must be a direct link between supply and consideration, there must be a direct link between a price reduction and the consideration for the supply for output VAT to be adjusted. The DHSC was not part of the supply chain as it was not paying for specific medicines (it was simply providing the ultimate general funding to the NHS) and was too far removed from the actual supplies to be treated as a final consumer. This being so, there could be no retrospective price reductions for VAT purposes. The only potential exception to this would be in limited cases where supplies were made directly from BIL to DHSC.

The UT also considered HMRC’s alternative argument and agreed that even where the original supply was to the DHSC, no price reduction could be applied where medicines were supplied to the final consumer as a zero-rated supply. This would lead to a breach of fiscal neutrality and result in an absolute VAT loss.

CVC comment: Although this clarifies the UK’s current stance in which NHS pricing scheme payments can be treated as price reductions, this contradicts with similar previous decisions in the EU which allowed the taxpayer to reduce its taxable amount and reclaim output VAT and is a disappointing result for the pharmaceuticals sector. Given the significant sums involved it is expected this case will continue to proceed through the Courts. We understand there are a large number of appeals made by other pharmaceutical manufacturers in the UK in respect of similar claims made by them standing behind this appeal. This case once again highlights the importance of a direct link between payments and supplies, as well as the specific contractual and funding arrangements.

First Tier Tribunal

3. Zero Rated Mega Marshmallows

This is the latest, and perhaps (maybe!) the last, update in the long ongoing dispute in relation to Innovative Bites Limited’s (BIL) Mega Marshmallows (the product) and its correct VAT treatment, specifically whether it is a zero rated food item or standard rated confectionary. The dispute commenced in 2019 when HMRC took the view that the products were standard rated and assessed £472k output VAT for VAT accounting periods covering June 2015 to June 2019. BIL appealed the VAT assessment and the First tier Tax Tribunal (FTT), using a multi-factorial analysis, concluded that the product is not confectionary and is therefore zero rated. Our summary of the decision can be read here. HMRC appealed to the Upper Tribunal (UT); however, the UT upheld the decision. Our summary of the decision can be read here.

HMRC then appealed to the Court of Appeal (CoA) which disagreed with the UT stating that ‘save in the case of absurdities’, generally, if the terms of Note 5 are met that is conclusive in determining that the product is standard rated confectionary. As a result, it was found that if the product falls within the definition of ‘sweetened prepared food which is normally eaten with fingers’, the product is standard rated. However, the FTT did not reach a conclusion on this question; therefore, the case was remitted to a new panel of the FTT to reconsider.

It was agreed by all parties that the product is ‘sweetened prepared food’; therefore, the only dispute for the FTT  to determine was whether the product is ‘normally eaten with fingers’ or not. The FTT identified there are 4 ways to eating the product:

1. Roasted on a skewer/stick and eaten from skewer
2. Roasted on a skewer, taken off and once sufficiently cooled, eat with fingers
3. Roasted on a skewer, inserted in the middle of two biscuits, eaten as a s’more as sandwiched between crackers
4. Eaten straight from the pack with fingers

The FTT states that way B and D are considered as ‘eaten with fingers’ whilst A and C are not. Following an in-depth consideration, the Tribunal concluded the following:

“We find that 1) Way A, eating direct from the skewer, is more frequently used than Way B, taking from skewer and eating with fingers; 2) Way C, s’more, is more frequently used than Way D, unroasted from the packet. It therefore follows that in aggregate, we find as a fact that that the Product is more frequently eaten by one of the non-finger ways than by one of the with-the-fingers ways. To put it in mathematical formulation, because A > B and C > D, (A + C) > (B + D).”

As a result, the conclusion was that the product is not normally eaten with fingers and therefore it is a zero-rated food item. The appeal was allowed.

Constable VAT comment: Having progressed from the FTT to the CoA already, it is possible that the new panel of the FTT has now brought this long-running dispute to a conclusion regarding the VAT treatment of Mega Marshmallows; however, it will be interesting to see if HMRC appeals this decision to the UT. Whilst the unusual  nature of the dispute certainly has been interesting to those working in VAT, it does raise the question whether the zero rating provisions for food items are possibly too complex, bearing in mind the number of cases heard by the courts as to whether a product is standard or zero rated. In our view, if a mathematic equation is used to determine if something is eaten with fingers or not, perhaps it is indicative that the zero rating provisions (VAT legislation and HMRC guidance) are overly difficult to analyse and open to interpretation leading to many disputes over recent years as the VAT liability of the supply is commercially important to businesses.  This long-running saga certainly demonstrates that in cases of ambiguity professional advice is highly recommended, but, even then, an on-balance conclusion may be drawn. Whilst material sums of VAT could be at stake, especially considering the potential wider application of a decision to other businesses, it does make us question whether the significant cost to taxpayers (not only those directly involved in an appeal but the wider taxpayer base) and HMRC in terms of time and cost is worthwhile, considering the resource required when attending an independent tribunal hearing.    

4. Kittel principle: Knew or should have known

The FTT decision in Transwaste Recycling and Aggregates Ltd (Transwaste) is another case taken by HMRC applying the Kittel principle i.e. Transwaste knew or should have known that its transactions were connected with the fraudulent evasion of VAT. VAT assessments and penalties, 5 decisions in total, (including against directors personally) were issued by HMRC covering VAT accounting periods between 06/16 and 12/19, totalling £695k. The hearing took place over 6 days between May and November 2025.

The FTT upheld, in part, Transwaste’s appeal against the VAT assessments denying the company input VAT based on the Kittel principle. The FTT considered transactions with many suppliers over time and concluded that, although there had been VAT fraud in the supply chain, and the company had carried out limited due diligence, HMRC had not proven in all cases that the company had any awareness that it had been party to VAT fraud. The recovery of VAT incurred was allowed in respect of those transactions where HMRC had not proven that the Kittel tests applied and, as a result, penalties imposed were withdrawn.

In a partial success for HMRC, the FTT upheld the denial of input VAT recovery and the imposition of penalties in relation to transactions where it felt that Transwaste “knew or should have known” that the transactions were connected with the fraudulent evasion of VAT.

Constable VAT comment: The release of FTT decisions suggest that HMRC’s Fraud Investigation Service (FIS) has been/is focused on pursuing several ‘Kittel’ type cases, with quite limited success in the courts. HMRC FIS often only discovers that fraudulent evasion of VAT has occurred when the fraudsters have disappeared, HMRC FIS has a difficult task to be effective in real time. This may not be surprising in some regards, VAT being a self-assessing tax. That said, HMRC then seeks to challenge legitimate businesses entitlement to reclaim VAT paid in good faith to suppliers, disadvantaging those businesses. These cases seem to take a very long time to be heard (the first HMRC decision in Transwaste was issued in June 2018 taking 7 years to be reach the FTT) and HMRC knows that if it is unsuccessful at the FTT, it will not usually be required to contribute towards taxpayers’ costs, this leaves a question around fairness, bearing in mind it has a poor track record of success in these cases, and HMRC’s most recently published list of VAT appeal updates (14 April 2026) indicates that HMRC has not sought permission to appeal the cases it has lost to a higher court.   

5. Single or multiple supplies: Hampers

Some VAT cases are a timely reminder of the application of fundamental VAT rules and issues. Clearwater Hampers Limited [2026] UKFTT 00567  is very much an example of such a Tribunal case returning to the question of single or multiple supplies. The question posed to the Tribunal was whether when Clearwater supplied a luxury hamper, was the wicker basket that contained food items a separate supply or simply ancillary to the goods therein – a means of better enjoying those goods? Many food items are zero-rated for VAT purposes and, as one might expect, wicker baskets are not. If the basket was ancillary to the goods therein, it would follow the VAT liability of those goods falling to be apportioned between the standard rated and zero rated items in the basket.

Clearwater appealed HMRC’s decision to refuse a claim for the repayment of output tax on supplies of food and drink gift hampers which come packaged in a lidded wicker basket totalling £425,529 over VAT periods 04/20 to 01/24. Clearwater had accounted for output tax on the various containers that it used for its hampers. Previously, HMRC agreed following receiving an error correction notification from Clearwater that the containers which used a cardboard box, bamboo tray or open basket should be subject to a composite VAT rate determined by the contents of the basket and proportion of standard and zero-rated items. HMRC refunded the overpaid output VAT.

A further error correction was submitted for the lidded wicker basket. HMRC refused this concluding that the basket was a separate aim for the consumer, an aim in its own right, and hence rightly subject to full output VAT rather than a composite rate determined by the contents.

The Tribunal considered notable legal precedent that will be familiar to those that have had cause to consider this area, notably referring to exceptions to single supplies as follows:

“(1) There is a single supply where one or more supplies constitute a principal supply and the other supply or supplies constitute one or more ancillary supplies which do not amount to an end in themselves for customers but a means of better enjoying the principal service supplied: see Card Protection Plan Ltd v Customs and Excise Comrs (Case C-349/96) EU:C:1999:93, [1999] STC 270, [1999] 2 AC 601 (CPP Exception).

(2)There is a single supply where two or more elements or acts supplied by the taxable person are so closely linked that they form (objectively) a single, indivisible economic supply, which it would be artificial to split: see Levob Verzekeringen BV v Staatssecretaris van Financiën (Case C-41/04) EU:C:2005:649, [2006] STC 766, [2005] ECR I-9433 (Levob Exception)”

The Tribunal confirmed that this is a subjective analysis and should be based upon the typical consumer for the type of product being considered:

 “The essential test is whether, from the perspective of the average consumer, the supply in question does not constitute an end in itself but is a means of better enjoying the principal supply”. 

The Tribunal revisited numerous cases regarding more elaborate packaging and the contents therein and this is a very useful resource should a similar issue be faced. Various points were weighed by the Tribunal including the marketing of the product and the baskets use as a reusable “container”, the relevant cost of the hamper compared to other packaging options and the presentation to the consumer.

HMRC fell into a previous seen trap of relying on its own guidance as if the law. This guidance concludes that baskets are a standard-rated separate supply. Public Notices are not legally binding unless that has been specifically provided for in the legislation. For the greater part, similarly to HMRC manuals, they are simply a document that records HMRC’s understanding of the law.

The Tribunal concluded, following the Card Protection Plan precedent that:

“We find that the essence of the Product is that it is a gift of food and drink items that is attractively and securely packaged in a way commensurate with its value. The lidded basket serves to present and protect the Food and Drink Supplies and thereby is a means of better enjoying them as the gift that the Purchaser intends to give. The supply of the lidded basket is therefore ancillary to the Food and Drink Supplies, and shares their tax treatment, such that the composite VAT rate calculated for the Product as a whole is to be determined from the relative value of the zero-rated and standard-rated Food and Drink Supplies alone.”

The Tribunal was critical of HMRC’s approach to arguing in court as if its guidance was the law and was much influenced by the facts specific to the hampers in question. The food and drink in the hamper was of high value to be gifted and was the principal aim, the wicker basket a means to better enjoy the contents as a gift and for other practical reasons of protection of the products.  The appeal was allowed.

Constable comment: This is a helpful case for those in the hamper sector and it seems possible that there will be subsequent opportunities to reclaim output VAT. Single and multiple supply arguments tend to be technical and subjective and HMRC often reluctant to be persuaded that zero-rating or exemption prevails in such cases. It is essential that where disagreement with HMRC is on the horizon that matters are managed effectively from the outset. Once HMRC is entrenched it is often impossible to reverse a stance (without litigation) but sometimes HMRC is more open to discussions before that.

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.

HMRC NEWS

Help with VAT place of supply of services in the oil and gas sector – GfC18
HMRC has recently published GfC18 which can be used to find out how to decide the VAT place of supply for services in the oil and gas sector. The guidelines are aimed for VAT registered businesses in the oil and gas sector and may also be helpful to businesses operating in wind, carbon capture and storage. It explains HMRC’s recommended approach to deciding the place of supply of services in this sector.

Insurance (VAT Notice 701/36)
The above guidance can be used to find out about the VAT liability of insurance transactions and insurance related services. The information about the VAT treatment of guarantees and warranties in paragraph 3.7.2 has been updated by HMRC.

VAT on goods exported from the UK (VAT Notice 703)
The above guidance advises how and when taxpayers can apply zero rated VAT to exported goods. Some of the guidance contains the force of law. HMRC has recently updated information on official evidence in paragraphs 6.2, 7.1 and 7.2.

Tell HMRC about an option to tax on property as part of cancelling your VAT registration
HMRC has recently published a new guidance setting out how to tell HMRC about an option to tax on land and buildings as part of cancelling a VAT registration.

Domestic reverse charge procedure (VAT Notice 735)
This guidance details the VAT domestic reverse charge procedure which applies to the buying and selling of certain goods and services. HMRC updated the guidance by adding a new section ‘3.5.4 Electric vehicle charging’ which explains why the reverse charge does not apply to the supply of electricity at a charging point for electric vehicles.

Fulfilment House Due Diligence Scheme registered businesses list
The above link cane be used to check if the business that stores your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside of the UK. The list has been updated with 8 additions and 7 removals.

CASE REVIEW

First Tier Tribunal

1. Pre-registration input tax recovery

This case concerns Aspire In The Community Services Limited’s (ACSL) pre-registration input tax recovery. Aspire in the Community Ltd (ACL) was formed in 2009 and it was providing VAT exempt welfare services and it was registered with Care Quality Commission (CQC). ACSL was incorporated in 2011; however, it was not CQC registered and the scope of its services widened to include standard rated supplies. ACSL and ACL formed a group VAT registration with ACSL being the representative member. ACSL only commenced making taxable supplies after it was VAT grouped, it made no supplies prior to that and ACL only made VAT exempt supplies.

On the VAT group’s first VAT return, ACSL included a claim for pre-registration VAT  incurred prior to the effective date of registration (EDR). The usual time limits (4 years for goods and 6 months for services) and partial exemption calculations, based on a use-based method, was applied by ACSL to calculate the amount of post registration input tax and pre-registration VAT deductible. However, HMRC refused repayment of part of the input tax.

Pre-registration input tax is only deductible in accordance with HMRC’s discretion as provided for by Regulation 111, as under the normal input VAT recovery rules (Sections 25 and 26 of Regulation 101) only a ‘taxable person’ is entitled to recover VAT as input VAT which ACSL was not at the time input tax was incurred. In this case, it was common ground that HMRC allowed all of ACSL’s input VAT claimed to be ‘treated as input tax’, i.e. HMRC exercised its discretion in accordance with Regulation 111.

The only dispute that arose is how much input tax was actually deductible based on the normal input VAT recovery rules blended with HMRC’s perceived rules for pre-registration claims. HMRC argued that the pre-registration VAT exempt use of the goods and services should be taken into account in addition to the post-registration use which was partly taxable. ACSL took the view that partial exemption should solely consider post-VAT registration use (or intended use).

The First Tier Tribunal agreed with ACSL concluding that once HMRC allows pre-registration input VAT to be “treated as input tax” in accordance with Regulation 111, it is then treated as input tax in the period in which it is claimed and there is no statutory basis or discretion available to HMRC to take pre-registration VAT exempt usage into account. The recovery rate is determined in accordance with post-registration partial exemption calculations. The appeal was allowed.

Constable VAT Comment: This is certainly a very interesting case and we will await to see whether HMRC decides to appeal to the Upper Tribunal or simply amend its guidance or the application of its discretion. It seems the Tribunal concluded that once discretion is exercised under Regulation 111, the usual input VAT recovery rules apply without further discretion. Perhaps HMRC will take an alternative approach moving forward and incorporate pre-registration use at the discretion stage (Regulation 111) already. This is something we have seen HMRC apply with private schools following the change in VAT liability of their supplies, where the guidance specifically states that “HMRC has exercised its discretion to allow some recovery of this VAT”, implying that the apportionment for pre-registration use must be done under the ‘discretion’ of HMRC, rather than in accordance with the usual input VAT recovery rules which does not permit that. This was also highlighted by the Tribunal which commented: “ If HMRC consider that a fair and reasonable apportionment needs to be made between post- and pre-EDR use prior to usual input VAT recovery rules … this could arguably be done as part of the exercise of its discretion under Regulation 111.” However, that was not the basis of this appeal and the appellant was therefore successful.

2. VAT liability of public EV charging

In the case of Charge My Street Ltd (CMS) the First-tier Tax Tribunal (FTT) found that the reduced rate of VAT (5%) could apply to supplies of electricity via public electric vehicle (EV) charging points.

HMRC argued that the supplies of electricity were subject to VAT at the standard rate (20%), which is HMRC’s current policy as confirmed in its guidance. HMRC’s VAT Notice 701/19 ‘VAT on fuel and power’ reads:

“the recharging of electric vehicles, when using public charging points is always treated as standard rated for VAT, regardless of the quantity of electricity supplied”

It is expected that the FTT’s ruling in this case could have a wider impact for the EV sector; however, it should be noted that decisions of the FTT do not usually set a wider precedent. It will be interesting to see if HMRC seek to appeal the FTT’s decision or whether HMRC will revisit its current policy.

The reduced rate of VAT is available to domestic supplies of electricity. VAT legislation states that supplies of electricity to a customer of less than 1,000kWh per month are always considered to be domestic use.

HMRC argued that the reduced rate of VAT for domestic supplies could not apply for the following reasons:

• the supplies are made in public places
• the rate at which supplies are measured must be considered over the period during which the relevant supply takes place

HMRC also did not accept CMS’ points on fiscal neutrality (individuals should be charged the same rate of VAT regardless of whether they charge their car at home or in a public place).

There was also dispute over who CMS’ customer is. CMS argued that its supplies were made to the drivers. HMRC believed that in some cases CMS supplied its services to a third party, who then supplied the drivers (if that was the case, the 1,000kWh domestic threshold would be breached). The FTT allowed CMS’ appeal in part.

Constable VAT comment: This is an important initial ruling for the EV sector; however, it may not provide certainty if HMRC does not accept the FTT’s decision. it will be interesting to see if HMRC changes its policy or appeals the FTT’s decision. EV charging operators should review their VAT accounting position considering this case. It may be appropriate to submit disclosures, or protective disclosures, given four-year capping rules if suppliers believe VAT has been overdeclared, and subject to the unjust enrichment rules.

3. Single or multiple supply: Management fee for cattle

The case of  Alan and Diane McFarland   (Partnership) returns to the previously visited and revisited area of the sometimes fine line between providing zero-rated feed stuffs, exempt land supplies to house animals or whether there is a service provided that amounts to the standard-rated keep of animals.

The supplies in question were provided by the Partnership to Forge Farm Livestock Limited. The Partnership contended originally that there were multiple supplies of zero-rated feed and VAT exempt land. At the hearing, the Partnership advanced an additional argument that the principal supply was that of the zero-rated feed with all other services being ancillary. The VAT involved in this case was £120,828 in relation to VAT accounting periods 11/14 to 08/17 and following a decision made by HMRC on 21 December 2017. The case was heard in January of this year, over 8 years after HMRC’s decision was originally given.

The supply provided by the Partnership was multi-faceted, it included feeding the cattle, storage of feed stuffs, providing machinery and equipment, making up feedstuffs, using machinery, cleaning out old foodstuffs, sending animals to graze, organising veterinary care, cleaning and disinfecting the animal facilities and biometric recording of animals’ identity etc. No exclusive right over land was granted.

The Tribunal concluded that for the supply provided, that there were not separate supplies of land and animal feed or that one of those supplies was the principal and the other ancillary. It was confirmed that under Levob principles that the supply was an indivisible and more complex supply of animal keep with associated services. This was standard rated.

The partnership made arguments that previous interaction with HMRC had formed a legitimate expectation that the approach it had taken was correct. The Tribunal concluded that there “was not established any basis for a legitimate expectation”. The Tribunal stated:

“No clear, unambiguous and unqualified representation was ever made by HMRC that the supplies in issue would be treated as exempt or zero-rated. Indeed, Mr McFarland accepted in evidence that HMRC had never given him any written or oral assurance on the VAT liability of these arrangements, nor had he ever sought a formal ruling.”

Estoppel was also argued. The Tribunal stated:

“We reject the Partnership’s reliance on estoppel by convention. The doctrine requires, at minimum, a clearly shared common assumption between the parties, conduct by HMRC amounting to assent to that assumption, reliance by the Partnership on that shared assumption in subsequent mutual dealings, and resulting detriment. None of these elements is present”.

The appeal was dismissed.

Constable VAT comment: A complex supply which is indivisible, the elements of which form one overall service will commonly follow the VAT liability of that overarching supply not the constituent parts. Single and multiple supply positions are complicated and if there is any ambiguity advice should be sought. An end position can be fundamentally different to expectations or assumptions. Where HMRC has seen a previous VAT treatment or should be aware of this, the bar is set exceptionally high to argue that HMRC’s actions (or inaction) created a legitimate expectation that the VAT liabilities applied are correct. It is similarly difficult to argue that the estoppel principle applies such that an expectation that a taxpayer acted correctly was created by the conventions followed or tacitly allowed by HMRC.

4. Input VAT recovery: Alternative evidence

The appellant in this case before the First-tier Tax Tribunal (FTT), Mochars Limited (Mochars), has an effective date of VAT registration (EDR) of 1 June 2023. It submits monthly VAT returns because it is classified a VAT repayment trader as it receives regular refunds of VAT from HMRC. The business model is one which has become more familiar in recent years, luxury goods such as clothing, shoes and handbags are purchased in the UK (incurring UK VAT) which are then exported to customers located outside the UK, the goods being sent mainly, but not always, to clients in China. These UK businesses seek to reclaim VAT incurred on the purchase of the goods in the UK, the onward supply to a destination outside the UK being zero-rated, generating input VAT refund claims.

Mochars submitted a VAT repayment return in respect of the VAT accounting period ending 31 December 2023 (12/23) requesting a VAT refund of £29,394.80. HMRC instigated a pre-VAT repayment credibility check which saw the VAT refund requested reduced to just £76, hence the appeal.

In this case, the sole shareholder and director of the business usually purchased the goods to be resold and exported, sometimes goods were purchased by friends of Mochars director. When reviewing the 12/23 VAT return HMRC asked for detailed information in support of the VAT refund claim, this request included the 6 highest value purchase invoices which is in line with HMRC’s general initial approach in these circumstances. Despite several requests over a 6-month period, the invoices were not received, although the business forwarded a schedule of 101 supplier invoices demonstrating how the £29,394.80 was comprised.

The schedule of purchase invoices showed that many of the goods were purchased using a credit card and HMRC, not unreasonably, requested copies of credit card statements. None were forthcoming and some of the invoices initially requested by HMRC were not supplied until October 2024. These invoices (77 in number) were all from Harrods and dated September or October 2024 but related to purchases made between September and December 2023 and totalled VAT of just over £23k.

Mochars subsequently provided the remaining 24 invoices (equalling the 101 on the schedule earlier provided to HMRC) with a VAT value of slightly more than £6k, taking us to the £29k input VAT claim. HMRC confirmed that:

• The input VAT claims for most of the invoices included in the claim were to be disallowed because, at the time the input VAT was claimed, Mochars was not in possession of a valid tax invoice in its VAT accounting records.
• Mochars had provided no alternative evidence to support an entitlement to deduct VAT incurred as input VAT.
• If a valid tax invoice could subsequently be produced Mochars could submit a valid input VAT claim.
• By exercising a degree of discretion, which HMRC is allowed to do, HMRC would permit a £76 input VAT claim in relation to VAT incurred on Mochars accountants’ fees. The VAT refund initially claimed was reduced from £29,394.80 to £76.

In December 2025 Mochars submitted an error correction notification (ECN) to HMRC in respect of 77 of the 101 invoices included in the 12/23 input VAT claim. These sums have been refunded to Mochars and the business withdrew that aspect of its appeal at the start of the FTT hearing leaving the recovery of VAT incurred in relation to the remaining 24 transactions as the point at issue.

Mochars director confirmed at the beginning of the hearing (which took place on 16 February 2026) that:

• It did not have any valid tax invoices for any of the transactions included on the 12/23 VAT return until September 2024.
• The remaining 24 invoices in dispute were still not available.
• Bank statements to support the purchase of the goods had still not been provided to HMRC.

The VAT in dispute in relation to the 24 disputed transactions totalled £6,128.78. Mochars argument was that HMRC had failed to consider exercising discretion to allow an input VAT reclaim as required by VAT law. The condition attached to VAT regulation 29(2), does permit HMRC to accept alternate evidence other than valid VAT invoices to support an entitlement to deduct input VAT, and, by failing to do so HMRC did not give Mochars any opportunity to provide any alternative evidence. The FTT was not persuaded and dismissed the appeal, commenting at paragraph 34 of the decision:

Furthermore, given the wording of the pre-decision letter as a whole, we also find that Officer Hussain considered exercising his discretion in relation to the 24 transactions. However, given the complete lack of corroborative evidence that would allow the purchases to be verified (despite being asked for over nearly seven months), it was inevitable that the decision would be to refuse the input tax claims.”

Constable VAT Comment: We are not surprised at HMRC’s approach in relation to this case or the FTT’s decision. HMRC can exercise discretion and accept alternative evidence to support input VAT claims. HMRC guidance manuals confirm that ‘HMRC staff will not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due, nevertheless this obligation must be balanced against a duty to protect the public revenue’. In this case the taxpayer had not produced invoices or copy bank statements or any other evidence to support its entitlement to reclaim VAT incurred in over 2 years following submission of its 12/23 VAT return and the outcome seems almost inevitable. Where suppliers tax invoices are not held, and a business is having difficulty obtaining that documentation, it is important that suitable alternative evidence is obtained and retained to support an entitlement to deduct. If businesses have concerns regarding the quality of evidence held to support input VAT claims, please do not hesitate to contact Constable VAT.  

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.

Christmas and New Year closure

We will be closing our office at 5.30pm on Wednesday, 24th December 2025 and will reopen on Friday, 2 January 2026 at 9am. If you have any urgent queries during this time, please contact your usual Constable VAT partner by email and they will respond to you as soon as possible.

We have not sent Christmas cards this year and instead donated to two charities – Little Lifts and the Stroke Association. However, we would like to take this opportunity to wish all our clients and regular readers a Merry Christmas and a happy and prosperous New Year.

HMRC NEWS

HM Revenue and Customs Brief 9 (2025): VAT Liability of the supply of temporary medical staff
This newly published brief sets out HMRC’s revised interpretation of the VAT exemption in respect of ‘The provision of a deputy for a person registered in the register of medical practitioners’. Previously, HMRC’s position was that exemption is restricted to the supply of deputising services, like the GP out of hours service. Following the Isle of Wight NHS Trust v HMRC [2025] UKFTT 1114 (TC) case, HMRC now accepts, and will not appeal, the Tribunal’s conclusion that VAT exemption also applied to supplies of staff, not just the supply of medical care. The Tribunal found that the exemption applied to locum doctors, including those provided by employment businesses and was therefore not limited to out of hours GP cover.

HMRC has confirmed that it will issue updated guidance in respect of the decision in due course and in the meantime those businesses who charged VAT (20%) on supplies of locum doctors in the previous 4 years can now reclaim overdeclared output VAT via an error correction notification or adjust VAT returns (subject to the applicable thresholds). We would flag that if supplies are retrospectively treated as VAT exempt, this will likely have an impact on the amount of input VAT that was recoverable and must be taken into account as part of any error correction notification. The unjust enrichment provisions may also need to be considered. It is very important that any error correction submitted to HMRC is carefully managed, and we would recommend seeking professional VAT advice if your business requires assistance with this.

Group and divisional registration (VAT Notice 700/2)
The above guidance provides information about VAT grouping. Where it is considered necessary for the ‘protection of the revenue’, the VAT grouping legislation gives HMRC the power to prevent a person joining a VAT group or remove an existing member from a VAT group. HMRC has updated the definition of ‘protecting the revenue’ in section 4.1 of the above guidance.

Using postponed VAT accounting
This is a newly published collection of existing VAT notices bringing together postponed VAT accounting guidance, giving detailed information about:

• Checking when you can account for import VAT on your VAT Return
• How to complete your VAT Return to account for import VAT
• Getting your postponed import VAT statement
• Understanding your monthly postponed import VAT statements
• Managing your import duties and VAT accounts

Send details to support your VAT repayment claim
If taxpayers submit a VAT repayment return, meaning the input VAT recoverable exceeds the output VAT due, HMRC may send a letter or email requesting details in support of the VAT repayment claim. The above guidance provides support to taxpayers if they are required to provide additional information to HMRC. The guidance has now been updated to remove examples of specific documents to provide with the aim to make the guidance more clear.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if a business that stores goods in the UK is registered with the Fulfilment House Due Diligence Scheme. The list has been updated with 7 additions and 2 removals.

CASE REVIEW

First Tier Tribunal

1. VAT Error Corrections: The 4 year cap

In the case of Express Brands Ltd (EBL) the appellant sold goods via Amazon, eBay and other online channels. EBL sought repayments of output VAT over declared in the UK in respect of VAT accounting periods 06/14, 03/15, 03/16, 06/19 and 09/19 . The error came to light only after the German tax authority demanded VAT on sales made in Germany through Amazon. EBL submitted a VAT accounting error correction notification (ECN) in September 2023. HMRC allowed the portion of the claim relating to 09/19, which fell within the statutory time limit, but refused repayment for all earlier periods on the basis that the four year cap in section 80(4) VATA 1994 had elapsed.

EBL appealed, arguing that the Tribunal should interpret the legislation and the VAT Regulations more flexibly, relying partly on fairness and partly on the Limitation Act 1980. Whilst the Tribunal had sympathy for the commercial consequences, EBL faced paying VAT twice across two jurisdictions, it emphasised that the law simply leaves no room for discretion. The Tribunal confirmed that Section 80(4) is mandatory. If a claim is made more than four years after the end of the relevant VAT period, HMRC “shall not” be liable to repay it.  The Tribunal also agreed with HMRC that the Regulations, on which EBL sought to rely on, (including the discretion in regulation 35) cannot override the primary legislation. As the older claims ranged from 66 to nearly 1,900 days out of time, the Tribunal dismissed the appeal.

Constable VAT Comment: Whilst this was a fairly straightforward decision for the Tribunal, it is a very important reminder that the four year cap within Section 80 is a firm deadline and offers no flexibility or room for discretion and it is unforgivingly rigid. HMRC referred to earlier Upper Tribunal decisions (which sets precedent) quoting that “Section 80 gives no discretion either to the Commissioners or to the Tribunal. It is absolutely clear and has to be applied”. HMRC went further to confirm that the statute also does not provide for any mitigation or consideration of unfortunate circumstances. Whilst we have sympathy for the appellant, legislation provides that the four-year cap must be interpreted strictly. If any error corrections are being considered, it is crucial that all VAT accounting periods are monitored closely and error corrections are notified to HMRC within the appropriate time limits. Constable VAT has significant experience in assisting clients with error correction notifications. If you or your business needs further support or wish to discuss submission of a possible error correction, please do not hesitate to contact us.

2. VAT Exemption: Welfare Services

Cascade Care Ltd (CCL) provides specialist supported living services to adults with mental health needs, autism, learning disabilities and acquired brain injuries. CCL delivers its services at sites in England and Wales. Its appeal concerned services supplied in Wales only.

Following submission of a non-statutory clearance application by CCL, HMRC confirmed that CCL’s supplies made in Wales fell within the VAT exemption for supplies of welfare services. CCL argued that its supplies fell outside the VAT exemption (were taxable and subject to VAT at the standard rate) on the basis it was not state regulated in Wales.

Welfare services may be exempt from VAT when supplied by a charity, state-regulated private welfare institution or agency, or a public body (Item 9, Group 7, Schedule 9, VAT Act 1994). Note 8 to Group 7 defines state-regulated for the purposes of the VAT exemption as follows:

“In this Group “state-regulated” means approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act, other than a provision that is capable of being brought into effect at different times in relation to different local authority areas.”

The Note then lists the relevant Acts. The listed Acts do not include the National Assembly of Wales. It is for this reason that CCL argued its supplies in Wales were not state-regulated and therefore VAT exemption does not apply. (Wales has devolved powers over health and social care and with effect from 1 January 2018 CCL’s services supplied in Wales were regulated by Care Inspectorate Wales (CIW). Regulation by CIW is pursuant to an act of the National Assembly of Wales.)

The First Tier Tribunal agreed with one of the arguments put forward by HMRC, supporting VAT exemption. The Tribunal stated that it was ‘abundantly sure’ that there had been a drafting error when the legislation was written and it was ‘abundantly clear’ that the provision that Parliament would have made would have been to include within the definition of ‘Act’, “an Act or Measure of the National Assembly for Wales”. The Tribunal commented:

“I have reached the view that this is one of those very rare occasions where it is permissible, and indeed required of me, to read words into legislation to correct an obvious drafting error.

The insertion is not too big, it simply completes a list of institutions reflecting devolution arrangements as they now prevail in the UK.

Further, the subject matter is not penal, it is concerned with the appropriate charging of VAT in a consistent and comprehensive manner across the nations of the UK.”

The Tribunal therefore dismissed CCL’s appeal. CCL’s supplies of welfare services in Wales, regulated by CIW, fall within the VAT exemption.

The Tribunal also considered HMRC’s other arguments on updating construction and conforming interpretation. The Tribunal commented that if it had not found for HMRC on the basis of correcting a drafting error, it would have found in favour of HMRC on the basis of a conforming interpretation. However, it found the arguments HMRC put forward concerning updating construction and the always speaking principle did not assist HMRC in this case.

Constable VAT comment: It is uncommon for the Tribunal to correct possible drafting errors, and this case provides an interesting review of circumstances when it is permissible for the Tribunal to do so. When the relevant legislation (Note 8) was drafted in 2002, the National Assembly for Wales could only pass delegated legislation, and it could not enact primary legislation in 2002. It will be interesting to see if CCL choses to pursue this matter further.   

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.

HMRC NEWS

Revenue and Customs Brief 6 (2025): VAT deduction on insurance intermediary services supplied outside the UK
HMRC has issued Brief 6 (2025) following the First-tier Tribunal’s (FTT) decision in Hastings Insurance Services Ltd, clarifying when insurance intermediaries can reclaim input VAT on services supplied outside the UK. Under the Specified Supplies Order (SSO), insurance intermediaries could recover VAT on supplies made to customers outside the UK. This was narrowed in 2019 by Article 3A, which limited recovery to cases where the final consumer (the insured party) was based outside the UK.

In the Hastings case, the FTT ruled that Article 3A conflicted with EU VAT Directive and that intermediaries could rely on the direct effect of EU law to reclaim VAT on supplies made before 31 December 2023 even if the insured party was UK-based. HMRC has accepted this ruling and will not appeal.

From 1 January 2024, however, the legal position changes as EU law can no longer override UK legislation. As a result, Article 3A of the SSO once again restricts input VAT recovery to cases where the final consumer (insured party) is outside the UK.

Insurance intermediaries who made supplies to customers outside the UK before 1 January 2024 where the final insured party was based in the UK may be entitled to claim under-recovered input tax. Businesses should review their VAT records and, if applicable, submit an error correction notice within the standard four-year time limit, ensuring they have supporting documentation and revised partial exemption calculations. If you believe your business is affected and may be required to do an error correction, please do not hesitate to get in touch with Constable VAT and we would be pleased to assist.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)
The above guidance provides assistance in determining when it is possible to zero rate supplies of medical and research goods and services that have been funded by charities. HMRC has updated section 4.2.2 to include information about the meaning of ‘medical equipment’. Section 4.9 has also been updated to describe when ‘training models’ can be zero rated.

VAT refunds for new builds if you’re a DIY housebuilder
This guidance provides information about claiming a VAT refund using the DIY housebuilder scheme. The guidance has been updated to confirm that you are able to provide additional information if your claim has been rejected or not paid in full. The guidance was updated accordingly in relation to conversions and charity buildings.

Updates on VAT appeals
This link can be used to check the list of VAT appeals that HMRC has lost, or partly lost, that could have implications for other businesses. The list of VAT appeals has been updated with 6 additions, 5 amendments and 2 removals.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if the business that stores your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside of the UK. The list has been updated with 11 additions and 5 removals.

CASE REVIEW

Supreme Court

1. VAT on hospital car parking

This appeal before the Supreme Court concerned whether VAT should have been charged on the supply of car parking at hospitals by Northumbria Healthcare NHS Foundation Trust (the Trust).

VAT is usually chargeable on supplies of car parking; however, there is an exception for public bodies when they are acting as public authorities. A public body acts as a ‘public authority’ when it is acting under a ‘special legal regime’ (SLR). An SLR is whereby activities are undertaken by a public body which it has a statutory obligation to provide, or must perform in a way that is different to private sector providers. The Trust argued that it was acting under a SLR because in relation to its car parking provision it followed guidance from the Department of Health and was under the general public law obligation to follow such guidance in the absence of good reason.

For background, HMRC refused to repay output VAT that had been accounted for by the Trust. The Trust appealed HMRC’s ruling. The First Tier Tribunal (FTT) rejected the Trust’s arguments and further held that if the Trust was acting under a SLR it would still need to account for output VAT as otherwise there would be a significant distortion of competition. The Upper Tribunal upheld the FTTs verdict. The Court of Appeal (CoA), on the other hand, allowed the Trust’s appeal. Our summary of the CoA decision can be read here.

HMRC appealed the CoA decision. The Supreme Court has found that the CoA was wrong to conclude that external guidance (issued by the Department of Health) combined with the general public law obligation to follow such guidance (unless there was a good reason not to) was sufficient to amount to a SLR because guidance does not amount to a legal obligation. Guidance provides a framework within which a public body should ordinarily act, there is flexibility to guidance which means that it cannot constitute a SLR.

Although it did not need to consider it, having concluded that the Trust was not acting under a SLR, the Supreme Court commented on the distortion of competition point. The aim of the distortion of competition criteria is to ensure fiscal neutrality so that private operators are not at a disadvantage because their services are taxed whereas public bodies are not. The FTT found that the car parking in question was not restricted to hospital users only and there was significantly greater demand for car parking than was available at the Trust’s car parks. Therefore, when considering the competition point, the comparison is between the hospital car parking and private car parking near the hospital. The provision of car parking by the Trust and private operators was similar and met the same needs so as to be in competition.

Constable VAT comment: this is an important ruling, being a test case with up to 70 similar appeals stood behind it with total VAT at stake in the region of £100m. Were it possible to challenge the ruling that an obligation to follow guidance cannot constitute a SLR, the Supreme Court’s comments concerning the distortion of competition appears to limit the opportunity for the 70 cases stood behind this to pursue their own appeals.

Upper Tribunal

2. VAT Exemption: Medical care

In this case, Illuminate Skins Clinics Limited (ISC) appealed the First Tier Tribunal’s (FTT) decision that the VAT exemption for the provision of medical care by a registered medical practitioner did not apply to its various aesthetic and skincare treatments. Our summary of the FTT decision can be read here; however, in brief, the FTT reached its decision that ISC’s services did not qualify for VAT exemption, partly, on the fact that there was little to no evidence of a diagnosis being made and ISC’s customers use its services because they want to for aesthetic reasons, not because of a diagnosis by a medical practitioner of a disease or health disorder.

ISC appealed to the Upper Tribunal (UT) on four grounds. The first two grounds allege that the FTT applied the wrong legal test when determining whether the services of ISC can fall within the VAT exemption for ‘medical care’, arguing that the FTT wrongly focused on the ‘commercial and economic reality’ considering the nature of supplies from a perspective of a typical customer, and also in asking whether the ‘primary purpose’  was medical as opposed to whether the service was ‘purely cosmetic’. The UT rejected these grounds stating that the FTT was right to consider that it should seek to identify the primary purpose of ISC’s supplies.

The argument that VAT exemption does not apply only in circumstances where a treatment is purely cosmetic was rejected, with the UT stating that where the therapeutic purpose is accompanied by a cosmetic purpose it is necessary to decide whether the therapeutic purpose is the primary purpose, which will involve a multi-factorial analysis.

The UT went on to find that the FTT had erred in law in relation to Ground 3. ISC argued the FTT confined its assessment of the therapeutic purpose of the care provided by ISC within a particularly narrow compass. The UT agreed specifically raising concerns over the ‘diagnosis’ point.

ISC had provided the FTT with examples of clients’ initial consultation documents which may have been cursory but nevertheless evidence of a diagnosis by a registered medical practitioner. The UT found that the FTT placed no weight on these documents and the FTT’s expectation as to how a diagnosis might be evidenced was too high and over-generalised. This error may have made a difference to the FTT’s decision that none of ISC’ supplies amounted to medical care, and as a result, the UT set the FTT’s decision aside and remitted the appeal back to the FTT to reconsider its decision in light of the UT’s comments and to consider specific cases as opposed to a general approach.

Constable VAT Comment: This has been a controversial topic for a considerable amount of time and this decision is bound to reignite discussion within the medical and cosmetic treatment sector. This is evidenced by the UT’s comment in its final paragraph that many cases are stayed behind this appeal, and it hopes that its decision will provide guidance in determining whether supplies of cosmetic treatments fall to be treated as VAT exempt supplies of medical care.

Whilst the decision and analysis involved was complex, ultimately the UT’s decision was summarised as follows:  “The supply must be made by a registered person and must have a therapeutic purpose. Where a supply has both a therapeutic purpose and a cosmetic purpose it is necessary to identify the principal/primary purpose. That will be a multi-factorial analysis which is likely to include consideration of the factors described at [105] above.”

The approach outlined at paragraphs 104 and 105 of the UT’s decision will be essential when considering whether cosmetic services fall within the VAT exemption for medical care.

First Tier Tribunal

3. VAT Exemption: Supplies of nursing staff

In 1st Alternative Medical Staffing Ltd v HMRC ([2025] UKFTT 1320 (TC)  the appellant (AMS) supplied nurses and care assistants to NHS and private hospitals and care homes. It had treated its commission for those supplies as subject to VAT, but the recharged employment costs were treated as VAT exempt. HMRC disagreed with that VAT exempt treatment and assessed for output VAT £265,590 (later revised to treat the monies received as VAT inclusive hence £221,325).

AMS appealed to the First-Tier tax Tribunal (FTT) the FTT recording this as on the basis:

“…the supplies were properly exempt as the provision of medical care or welfare services, that the Assessments were unreasonably made and/or that the Appellant was entitled to apply the terms of Notice 701/57, the Nursing Agencies Concession (NAC).”

Normally, there would be the opportunity to apply the NAC to such supplies. Unfortunately, AMS had not and it has previously been established that a VAT supply concession not taken up, cannot later then be applied retrospectively to those supplies. Where nursing staff are supplied to institutions outside the NAC, like most other supplies of staff, that supply is usually subject to VAT. This meant that AMS would need to be making a supply of medical care or a supply closely related to the supply of medical care “in any hospital or state-regulated institution.” rather than a supply of staff to benefit from VAT exemption.

It is a regularly litigated point that medical care is not provided by a body where it cedes supervision, direction and control to an end client institution, that is usually a supply of staff and subject to VAT.

In order that AMS supplies would be VAT exempt, it argued that the supplies made were closely related to the medical provision of a state regulated institution. Item 4 to Group 7 of Schedule 9 VAT Act 1994 requires that it is a state regulated body that will benefit from the VAT exemption where it provides the medical care, defining this at Note 8. Although alluding to the fact that it was state regulated by other state regulated bodies directing its staff AMS was not state regulated at that time. The FTT concluded that this precluded its supplies from being VAT exempt, they did not fall within Note 8 which gave the definition of state regulated, thus the exemption did not apply. AMS appeal was unsuccessful.

Constable VAT Comment: The sphere of staff supplies in the medical sector is complex with a history of challenge and drawing attention from HMRC. It is important to consider VAT implications at an early stage, as AMS discovered, it is sometimes not possible to rectify an issue later that could have been proactively managed with care and attention to the approach taken beforehand. It is often an assumption that, under the umbrella of health care, VAT exemption must apply when that is actually a fact sensitive position.

4. VAT Penalties: Reasonable excuse

DDK Projects Limited (DDK) submitted its VAT return in respect of the VAT accounting period ending 31 January 2024 on time, this VAT return recorded £629k owing to HMRC.

The director of the business with the responsibility of authorising the VAT payment to HMRC was away from the office from late February 2024, his partner was pregnant and, unfortunately, the birth of the child was problematic and meant that the director was absent from work for longer than intended. In addition, in early March 2024 the accountant who had set up the payment to be made to HMRC on 5 March 2024, was away from the office on compassionate leave, spending time with her mother who passed away later that month.

On 18 March 2024 the director of the business returned to work. On 8 April 2024 a letter from HMRC dated 28 March 2024 was received advising that the VAT payment due to HMRC had not been received. The VAT payment was made that day, along with £4k of interest.

The following day HMRC issued a £25k penalty, being the 15 days and 30 days late payment penalties, further daily penalties also arose. DDK requested an independent review of the penalties charged on the basis that it had a reasonable excuse for the oversight. HMRC rejected this and upheld the decision to issue the penalties.

The FTT found that DDK did have a reasonable excuse for its late payment of VAT to HMRC. There was no dispute that VAT owing to HMRC had been paid 32 days late. However, the FTT noted that HMRC’s own online guidance suggests that it will send a reminder that a VAT payment owing is late before the 15 days has expired. In this case HMRC did not send any correspondence to DDK until 28 March 2024, when the 15-day deadline had already passed. In addition, and as is often the case, the letter took 11 days to arrive, on 8 April 2024. This was a significant delay and as HMRC acknowledged in the case of Treasures of Brazil, the date on an HMRC letter may be backdated to a time earlier than when it is despatched.

HMRC argued that even if DDK did have a reasonable excuse in  the Director’s unexpected complete absence from work due to the difficult birth and his partner’s inability to care for herself or their baby, that excuse ceased when the director returned to work on 18 March 2024. However, the VAT remained unpaid until 8 April 2024 (three weeks later), meaning DDK did not remedy the failure without unreasonable delay once the reasonable excuse ceased.

The Tribunal found however that the combination of these factors in this particular case amounts to a reasonable excuse for the period from the date that the VAT became due until DDK received the letter from HMRC alerting it to the non-payment on 9 April 2024.

Constable VAT Comment: We were pleased to read that the Tribunal found in the taxpayer’s favour in this case. It is disappointing that in the circumstances of family emergencies, as outlined above, that HMRC behaved as it did and felt unable to exercise discretion and demonstrate compassion to the business at what was clearly a difficult time. The case was subject to a formal HMRC review by HMRC’s Solicitors Office and Legal Services Team and even at that stage, HMRC upheld the penalties charged meaning that the taxpayer’s only recourse was the submission of an appeal to the Tribunal with no doubt added cost and anxiety for the business. It remains to be seen whether this decision will be a barrier to HMRC taking similar action in similar circumstances in the future.

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.

HMRC NEWS

Check how to tell HMRC about VAT Return errors
The above guidance can be used to determine how to tell HMRC about VAT return errors and has been updated. This will normally be either adjusting your next VAT return (subject to certain thresholds), making the correction online or sending the correction in writing. If you need any support with notifying VAT return errors to HMRC, please get in touch and Constable VAT would be pleased to assist. We believe it is important that the error notification process is carefully managed to mitigate any penalty risks as far as possible.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if the business that stores your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside of the UK. The list has been updated with 7 additions and 8 removals.

Provide partnership details when you register for VAT
When a partnership is being VAT registered, Form VAT2 must be used to provide details of the partners. The above guidance has now been updated to confirm that Form VAT2 now asks for each partner’s date of birth.

Pay VAT after telling HMRC about goods sold to pay off a debt
This is a newly published guidance with assistance on what taxpayer’s will need to pay HMRC from a UK or overseas bank account, after telling HMRC about VAT due on goods sold to pay off a debt.

CASE REVIEW

Supreme Court

1. VAT groups and time of supply rules

The Supreme Court has now delivered the final decision in respect of the long running dispute concerning interaction of the VAT grouping provisions with the time of supply rules. The case of Prudential Assurance Company Ltd has progressed through the Tribunals and Courts creating significant ambiguity, with the Upper Tribunal (UT) overturning the First Tier Tribunal’s decision, and subsequently the Court of Appeal upholding the UT’s decision, although doing so in a 2-1 split decision. Our summary of the Court of Appeal decision can be read here.

Silverfleet performed investment fund management services for Prudential when they were both members of a VAT group. There is no ambiguity that supplies whilst VAT grouped were disregarded. However, many years after Silverfleet had stopped managing the funds for Prudential and left the VAT group, a success fee became payable due to exceeding targets in 2015/2016.

The question that arose was whether VAT is payable on the success fee? Very briefly put, HMRC’s point was VAT is due because at the time Silverfleet invoiced Prudential for the success fee they were no longer in the same group. On the other hand, Prudential’s view has been that the fee arose out of the services that were all performed whilst they were in the group, therefore, it is not subject to VAT.

The Supreme Court has stated that the VAT grouping rules (Section 43)  must be read alongside the time of supply rules (Regulation 90) and there is no basis for inferring a separate rule for VAT groups that depends on when the services were actually performed. The Court of Appeal was correct to apply Regulation 90 to determine the time of supply.

Following a very detailed analysis of the applicable legislation, including both domestic and the EU Principal VAT Directive, as well as case law, the Supreme Court ultimately concluded that the success fee must be regarded as a “successive payment” which relates to the earlier supply; therefore, that supply is only regarded as being completed at the end of the period to which the payment relates. On the basis that the chargeable event which gave rise to the success fee occurred after Silverfleet left the VAT group, VAT was correctly charged and HMRC’s decision was upheld.

Constable VAT Comment: Whilst not favourable to Prudential, this is a long awaited conclusion to the dispute concerning the relationship between the VAT grouping and time of supply rules. The case was heard by the FTT, UT, Court of Appeal and ultimately by The Supreme Court which now put the matter to rest. Interestingly, there were disagreements between Courts, demonstrated by the UT overturning the FTT’s decision, as well as the Court of Appeal concluding with a 2-1 split decision. This demonstrates the difficulty in interpreting complex legislation, and the difficulty in their application when presented with a unique scenario such as the one faced by Prudential. VAT is highly fact specific and each case will vary based on individual circumstances. Timings of supplies and VAT grouping has been a point regularly challenged by HMRC. In the case of ambiguity we would always recommend seeking professional VAT advice.

Court of Appeal

2. Partial Exemption: Special Method Override

The dispute between Hippodrome Casino Ltd (HCL) and HMRC progressed to the Court of Appeal, following the FTT’s and UT’s decisions. HCL operates a casino where most income arises from VAT exempt gaming and betting, but it also makes taxable supplies through its theatre, bars, and restaurants. Because many of its overheads such as rent, utilities, maintenance and security relate to both taxable and exempt activities, HCL sought to recover input VAT using a floor space based standard method override (SMO) calculation, arguing that this better reflected the true economic use of its VAT bearing costs than the standard turnover-based method.

In 2022, the FTT agreed with HCL finding that the floor space approach provided a fairer and more reasonable apportionment; however, HMRC appealed the decision of the FTT to the UT on the grounds that the FTT erred in law failing to consider that areas allocated to taxable activities such as bars and restaurants were also economically used by gaming customers, creating dual use of that space. The UT agreed, setting aside the FTT’s decision on the basis that the floor space method was flawed because it did not reflect the duality of use. Our summary of the UT decision can be read here.

HCL appealed to the Court of Appeal on various grounds. First, the Court considered whether the UT was right to set aside the decision of the FTT on grounds of material error. After hearing submissions from both parties, the Court concluded that the FTT failed to adequately address either aspect of the dual use arguments advanced by HMRC and therefore the UT correctly directed itself. The Court also stated that it would have arrived at the same conclusion as the UT, if it had to make a new decision.

HCL no longer contends that the floorspace method was more reliable than the standard method; however, it argued that the UT should have considered the standard method in isolation concluding that it is not fair and reasonable, and on that basis an alternative method should have been discussed. The Court rejected these grounds stating that UT was right simply to allow the appeal once it had concluded HCL’s floorspace method was discredited, which meant that the standard method applied by default. The burden was on HCL to show otherwise and it failed to do that. There were additional considerations around the calculation of input tax block on business entertainment which mostly consisted of complimentary food and drink given away to most valued customers. The Court agreed with HMRC on this matter also; therefore, the appeal was dismissed on all ground.

Constable VAT Comment: Similarly to Prudential, this is another well known case in the VAT sphere which  has progressed through each Tribunal and Court. This case concerns input VAT recovery, specifically the complexity of a standard method override (SMO) where the standard turnover based method fails to produce a fair and reasonable outcome in relation to the recovery of VAT incurred; also highlighting the complexities in agreeing a special method with HMRC, as this would normally require detailed worked examples to prove that any proposed method is more fair and reasonable than the standard method. It will be interesting to see if HCL appeals the decision and progresses to the Supreme Court where the decision will be final and concludes this long disputed matter. 

3. HMRC’s discretion: Alternative input VAT evidence

In this case, Hotelbeds UK Ltd (HUL), appealed HMRC’s refusal of two of the four error correction notices (ECNs) submitted for underclaimed input VAT. HUL is  a long-established wholesale supplier of hotel rooms. Following the industry practices, HUL shifted to a ‘virtual credit card’ (VCC) payment system which made it very difficult to obtain valid VAT invoices from  hotels (suppliers) as there was no real incentive for the hotels to complete the additional administration.

As a result, HUL maintained detailed records of all transactions and was regularly pursuing  its supplier hotels for VAT invoices, amounting to over 5,000 chaser emails, 800 telephone calls, to several suppliers exceeding 1,000 in total. HUL submitted four ECNs to HMRC  to reclaim underclaimed input VAT, relying on HMRC’s discretion to accept alternative evidence. Whilst HMRC allowed the first two claims, it rejected ECN 3 and 4. The amount of VAT involved was significant, in excess of £10million.

HUL relied on three policy guidance statements, which HMRC accepted to be current at the relevant time. These were VIT31200, HMRC’s Statement of Practice (SOP) and VAT Notice 700. All of these documents were supportive of HUL’s arguments that HMRC must consider alternative evidence where it was not possible to obtain a valid VAT invoice. HUL had the majority (if not all) of the required evidence as set out in the policy documents, and on that basis it argued that HMRC’s rejection is unreasonable and unlawful. This is supported by the fact that the first two ECNs were accepted which were materially very similar, if not the same as ECN 3 and 4. HMRC’s view was that HUL had ‘systematically failed’ to obtain VAT invoices from its hotel suppliers.

The Court had no real difficulty in dismissing HMRC’s arguments stating that HMRC misapplied its own guidance and unfairly fettered its discretion by refusing to consider the extensive alternative evidence HUL provided. The Court addressed the issue that the policy documents refer to ‘invalid VAT invoices’ as opposed to the absence of VAT invoices; however, the documents should apply to both scenarios equally. Whilst HMRC has an obligation to protect the Revenue, the Court held that there was no suggestion of fraud, no missing suppliers, and no ongoing risk to the VAT system. On that basis, it was concluded that the decision to withhold the repayment of VAT incurred as input VAT was irrational, inconsistent, and contrary to public law principles, also breaching the EU principle of effectiveness. The application for judicial review was allowed.

Constable VAT Comment: This is a helpful case for input VAT recovery where taxpayers have difficulties in obtaining valid VAT invoices from their suppliers. It is a welcome reminder that HMRC must exercise  discretion in such cases as “The purpose of the discretion is to recognise, necessarily, that the neutrality of the tax is important. Failure to recover input tax is non-neutral.” Taxpayers should not pay more tax than is required. However, we would also flag that HUL had very good alternative evidence that supplies had been received and paid for, satisfying almost all HMRC’s checklist set out in policy documents for alternative evidence to support an entitlement to deduct VAT incurred as input VAT. Where a taxpayer wishes to rely on alternative evidence to reclaim input VAT, it is important this is considered first in great detail and whether a robust defence can be mounted to any challenge from HMRC. We would recommend seeking professional advice in a situation where VAT invoices are not held. On a wider point, and not withstanding HMRC’s duty to collect tax, it is a cause of regret that HMRC should chose to pursue the matter in this case where the taxpayer has done all it can to obtain supporting evidence to allow it to claim input VAT, and a pragmatic approach taken and a degree of judgement exercised. 

FTT

4. Fitting of carpet: Single or separate supply?

The appellant, United Carpets (Franchisor) Ltd (UC), sells flooring products and offers customers the option of being referred to an independent, self-employed fitter to install the flooring. Each store has a pool of fitters who take on fitting work referred to them by UC. In terms of allocating fitters to particular jobs, it is UC who determines which fitter is allocated to which customer in the fitting diary. Customers pay the fitter directly and the rates charged by the fitters are determined by the fitters themselves. UC receives no part of the fitting fee. UC considered the fitting service to be a separate supply and only accounted for output VAT on the sale of goods. However; HMRC raised VAT assessments totalling £496,823, arguing that the fitting services formed part of a single composite supply of goods and associated fitting services by UC and output VAT is due on the entire consideration including the goods and fitting service.

The Tribunal first considered who made the supply of the fitting services for VAT purposes, whether it was the independent fitter or UC making a single supply (the “Supply Issue”). The Tribunal adopted a three-stage test in considering the contractual documentation and the economic and commercial reality. Following this, the Tribunal concluded that there were two separate supplies, the first of which comprised of the supply of goods by UC to the customer, and the second of which comprised the supply of services (fitting) by the independent fitter to the customer.

For the above reasons, the appeal was allowed on the ‘Supply Issue’. UC also made an alternative argument on ‘legitimate expectation’ due to HMRC’s behaviour during the inspection; however, the Tribunal decided against UC on this issue. Nevertheless, the decision in relation to the ‘Supply Issue’ was sufficient to allow the appeal and HMRC’s output VAT assessments were cancelled.

Constable VAT Comment: This was another lengthy decision considering who supplied what, to who, in return for what consideration. The Tribunal relied on extensive case law concerning single and multiple supplies in reaching its decision to allow UC’s appeal. However, perhaps the ‘legitimate expectation’ issue and the Tribunal’s analysis of this would be crucial to those dealing with ongoing HMRC inspections. During the inspection, prior to raising VAT assessments, HMRC wrote to UC stating:

“HMRC has reviewed the current business contractual arrangements implemented in August 2020 as per your letter dated 23rd November 2020 and has decided to take no further at this time. However, this is a finely balanced decision. HMRC will be considering how the sector more broadly arranges its supplies, and this further review may result in HMRC clarifying its view of common contractual arrangements both in this sector and beyond.”

UC attempted to argue the above would create a legitimate expectation, arguing that an ordinarily sophisticated taxpayer would have understood the above to mean that HMRC had deliberated the matter internally, reviewed the Appellant’s contractual arrangements and decided to take no further action, including raising assessments.

Whilst the Tribunal appreciated UC put all of its cards ‘face up’, it stressed the importance of the phrase ‘at this time’ in HMRC’s wording. The Tribunal found there was no “clear and unambiguous statement” creating a legitimate expectation on which UC may rely. This is very important for all those dealing with ongoing HMRC inspections as it demonstrates that HMRC has the power to revisit previous inspections where a firm and definitive conclusion was not reached.

5. VAT Zero Rating: Is nitrous oxide food?

In this case, Telamara Limited (TL) appealed HMRC’s assessment for underdeclared output VAT in respect of supplies of nitrous oxide (N2O), in the sum of circa £1.5million. TL supplies metal chargers containing N2O designed for use by the catering industry in machinery for whipping cream and also making other foam-like foods.

The case turned on a deceptively simple question: were the metal chargers “food of a kind used for human consumption” eligible for zero-rating under Item 1, Group 1 of Schedule 8 to the VAT Act 1994  or were they standard-rated goods? TL contended that because the N2O was food grade, regulated as E942 under EU food law, and used exclusively in preparing edible products such as whipped cream and foams, it should qualify as food, whilst HMRC took the view that although the gas was used in food preparation, it was not itself food.

After reviewing detailed expert advice on N2O, the Tribunal found that N2O is not a food substance noting that it is colourless, odourless, tasteless, non-nutritious, and cannot be eaten or drunk. Its effects are purely mechanical, not culinary in the sense of altering the food’s composition. On that basis the Tribunal concluded the supplies were standard rated.

Constable VAT Comment: Whilst the Tribunal had little difficulty in reaching this conclusion, and it is unlikely that the specific facts of this case will be binding on many taxpayers, the case is a reminder to all those in the catering/food industry that there has been an increasing number of Tribunal cases concerning the VAT liability of ‘food’ items. This has been a popular topic of litigation, implying that HMRC takes a strict interpretation of the applicable legislation. Where significant sums are involved or the VAT implications are ambiguous, we would always recommend seeking professional advice. 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.

6. VAT Exemption: Medical care

In this case, the Isle of Wight NHS Trust (The Trust) appealed HMRC’s decision, from August 2021, that the supply of locum medical practitioners by staffing agencies (Locums) is not VAT exempt under Item 5, Group 7, Schedule 9, Value Added Tax 1994. HMRC argued that the exemption had to be interpreted narrowly in light of the EU Principal VAT Directive (PVD). In their view, the exemption covered only the personal service of a deputy, a temporary replacement for an identified GP, rather than the broader supply of staff as part of a deputising arrangement.

The Trust disagreed with HMRC. Item 5, Group 7, Schedule 9 exempts the “the provision of a deputy for a person registered in the register of medical practitioners.” The Trust maintained the view that the locum doctors were clearly acting as deputies for registered medical practitioners and that the exemption therefore applied.

The FTT rejected HMRC’s arguments, holding that the ordinary wording of the UK legislation was decisive. The phrase “provision of a deputy” was found to mean what it says: the supply of a person appointed to act on behalf of another registered medical practitioner. Nothing in the legislative history or wider context indicated that this straightforward reading should be displaced. On that basis, the Tribunal concluded that The Trust received services which should have been VAT exempt. The appeal was allowed.

Constable VAT Comment: This case considered the interpretation of Item 5, Group 7, Schedule 9 VATA 1994, concerning medical VAT exemption. Whilst discussions will be of particular interest those involved in the medical sector; the full decision also offers useful commentary on the continued application of EU law, conforming construction and key principles of statutory interpretation which will be of interest to those involved in VAT litigation and advisory. The case was designated as a lead appeal, with around 20 similar disputes awaiting its outcome; therefore, we will await any further developments, specifically whether HMRC will seek to appeal the decision. The line between taxable supplies of staff or services covered by the medical VAT exemption remains a point of contention with HMRC, an appeal by HMRC seems quite possible. HMRC might have strategized that the FTT is only binding to the parties involved and not appeal rejecting the position for others as continued policy but that is more difficult as a lead case with others stood behind.

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.

HMRC NEWS

Revenue and Customs Brief 3 (2025): VAT treatment of income received from charity fundraising events
Following the Upper Tribunal’s (UT) decision in the Yorkshire Agriculture Society ([2205] UKUT 00004), HMRC has now released this newly published RCB3 to provide an update on the VAT treatment of supplies made by charities and other qualifying bodies in connection with fundraising events.

Charities and other qualifying bodies may treat certain supplies of goods and services as VAT exempt if they are made as part of an event held to raise funds for charitable activities. VAT legislation states that:

• The primary purpose of the event must be the raising of money
• The event must be ‘promoted as being primarily’ for the raising of money

The UT has now confirmed that there can be more than one primary purpose. As such, the ‘fundraising’ primary purpose can be ‘a primary purpose’ and not only ‘the primary purpose’. This widens the scope of the relief as HMRC accepts that there may be two primary purposes and if these cannot be separated in importance, the exemption can still apply provided one of those primary purposes is the raising of funds. In addition, the UT found that the word ‘primarily’ in ‘promoted as being primarily for the raising of money’ should be ignored.  This means that the event must still be promoted as a fundraising one but does not need to emphasise this as a primary purpose.

HMRC has now confirmed its policy remains that the primary purpose of the event must be that of fundraising and that the event must be advertised as a fundraising event. If there is more than one primary purpose, charities and other qualifying bodies must be able to evidence this and provide a clear explanation as to why they cannot be separated in terms of importance.

Constable VAT Comment: Overall, the UT’s decision provides a more inclusive interpretation of the legislation that favours charities, although HMRC’s guidance suggests that the path to VAT exemption will still require careful navigation including clear documentation and justification where there is possibly more than one primary purpose of the event. In addition to the ‘primary purpose’ and ‘promoted primarily’ implications, there are other conditions to take into account before an event can be treated as VAT exempt fundraising including what is an ‘event’, how many events are held and many more. Before treating an event as VAT exempt, and in the case of any ambiguity we would recommend seeking professional advice and Constable VAT would be pleased to assist. For example, many charities that organise events may charge a fee to exhibitors and supplies such as these, exhibition charges and fees, are not specifically mentioned in HMRC guidance, the focus may only be on admission fees charged to the public to attend an event. In the case of Southport Flower Show (2012 decision) the charity reclaimed input VAT on the basis that it had opted to tax land on which exhibitors paid a fee to promote and advertise their goods and services at a VAT exempt charity fundraising event.

The charity treated its supplies of admission ticket sales to the show and a gala dinner as VAT exempt under the fund-raising exemption; however, because it had opted to tax the land that trade exhibitors occupied it charged and accounted for VAT on those supplies, and reclaimed input VAT on the costs it incurred on the hire of trade stands. The Tribunal rejected the charity’s argument and dismissed its appeal, the tribunal chairman noting that ‘the option to tax does not exclude exemption by virtue of Group 12’, Group 12, Schedule 9, VATA 1994 being the relevant law in relation to fund-raising events by charities and other qualifying bodies.

This decision supports HMRC’s policy that the option to tax may override the property exemption but it does not override the fundraising exemption and also serves to example the complexities that may arise.     

Revenue and Customs Brief 4 (2025): VAT deduction on the management of pension funds
This newly published brief announces a further HMRC policy change to input VAT deduction on the management of pension funds, following the decision of the Court of Justice of the European Union (CJEU) in the ‘Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG)’ case.

HMRC’s historic policy was that where there was dual use of investment costs by an employer and trustees, a method of apportionment on a fair and reasonable basis to determine how much input tax could be deducted by each party was required.  However, following the release of RCB4, HMRC will no longer view investment costs as being subject to dual use. Instead, all the associated input VAT incurred will be seen as the employer’s and deductible by the employer, subject to the normal rules.

The Brief is very much a headline comment and further guidance is expected from HMRC which will, it is hoped, qualify the extent of costs that HMRC may accept as deductible by an employer.

Check where an online marketplace seller is established
HMRC has recently released this new guidance aimed at online marketplace operators, advising on how to check if a seller is established outside the UK, and to work out who is liable for VAT on sales.

Investment gold coins (VAT Notice 701/21A)
The above guidance sets out a list of gold coins considered as investment gold coins for VAT exemption as detailed in Group 15 to Schedule 9 of the VAT Act 1994. The UK list of coins recognised as investment gold coins has been updated.

CASE REVIEW

Upper Tribunal

1. Single and multiple supplies

In JPMorgan Chase Bank N.A (CBNA) the Upper Tribunal (UT) dismissed CBNA’s appeal and upheld HMRC’s view that intra-group services supplied by CBNA to JP Morgan Securities plc (SPLC) constituted a single taxable supply for VAT purposes. Our summary of the FTT decision can be read here.

CBNA, a US-regulated bank within the global JPMorgan group, provided a wide range of operational and infrastructure services to SPLC, a UK-based trading entity. Both were part of the same UK VAT group registration meaning intra-group supplies are normally disregarded; however, CBNA incurred costs from overseas suppliers, bringing it within the scope of VAT.

At the heart of the appeal were three key issues. First, whether CBNA provided a single composite supply of support services or multiple distinct supplies tailored to different business areas. Second, depending on that determination, whether the supply was taxable or exempt. Third, if multiple supplies existed, whether any of them were exempt under the financial services VAT exemption rules.

CBNA claimed it made multiple supplies—either seven distinct services for different business areas, or two types: Business Delivery Services and Support Services. It argued that some services should be exempt under EU financial services provisions. HMRC contended, and the FTT agreed, that CBNA provided a single, integrated support function to SPLC to enable it to conduct its trading business compliantly across global markets.

The Tribunal found that the services were indivisible, economically integrated, and not separately available, forming a single composite supply. It rejected the idea that invoicing breakdowns or internal service labels altered the VAT analysis and applied tests from key cases, focusing on the “typical consumer” and economic reality. The contractual distinctions introduced in 2019, prompted in part by ongoing disputes with HMRC, did not reflect any real change in service delivery.

Having found there was a single taxable supply there was no need to consider the third issue; however, the UT commented that even if there had been multiple supplies, none qualified for exemption. The services were largely operational and infrastructure in nature, and, therefore, did not fall within the scope of VAT exempt financial services. The appeal was dismissed.

Constable VAT Comment: This is a complex decision which reinforces that the economic substance of a transaction overrides contractual form in VAT analysis. Intra-group service arrangements, especially in large financial institutions, will be judged on their economic integration—not internal labels or invoice breakdowns. It will be interesting to see whether CBNA decides to appeal the Upper Tribunal’s decision, taking matters to the Court of Appeal.

First Tier Tribunal

2. VAT Exemption for financial intermediaries

In the case of Performance Leads Limited (PLL), HMRC denied an error correction notice (ECN)  submitted by PLL in the sum of £247,407 for overpaid VAT. PLL operates two websites that connects individuals  seeking financial advice with FCA authorised independent financial advisors (IFAs). The IFAs paid PLL a fee per lead. Historically, PLL treated its services as standard rated declaring output VAT; however, PLL latterly formed the view that its supplies were VAT-exempt as financial intermediaries under Schedule 9, Group, 5 Item 5, of the VAT Act 1994.

PLL submitted the ECN on that basis; however, HMRC rejected PLL’s claim on two grounds arguing that PLL had not demonstrated the leads resulted in exempt financial services; and second, that its activities did not amount to “work preparatory to the conclusion of contracts”. HMRC characterized PLL’s work as advertising, which is explicitly excluded from VAT exemption.

The Tribunal had no difficulty in rejecting HMRC’s arguments. The FTT found that PLL’s services went far beyond advertising as it carried out meaningful filtering of user enquiries, ensuring that only relevant and monetisable leads were passed to IFAs. The Tribunal found that PLL’s role in bringing together individuals and IFAs meant it was acting in an intermediary capacity, even though it did not participate in the actual negotiation of financial contracts; however, as most of the relevant financial services provided by the IFAs fell under Item 6 of the VAT exemption, there was no requirement for PLL to perform “work preparatory to the conclusion of contracts”, which only applies to other financial categories. On that basis, the appeal was allowed.

Constable VAT Comment: This was an interesting case considering where to draw the line between supplies of standard rated advertising services and VAT exempt lead generation falling within ‘financial intermediary services’. Another point worth noting in this case was the Tribunal’s concerns over HMRC’s handling of the case. The dispute initially went through an Alternative Dispute Resolution (ADR) meeting. During the process, the parties agreed the sole legal issue to consider at the FTT; however, HMRC later attempted to introduce further arguments. The Tribunal criticised this as ‘undesirable’ and contrary to good procedural practice; nevertheless all arguments were heard and HMRC’s decision was overturned. It remains to be seen whether HMRC appeals this decision to the Upper Tribunal.

It was perhaps surprising that the FTT allowed exemption for all leads as potential customers may be seeking financial advice only, or a discretionary/managed portfolio service that would be taxable. If the underlying product was not VAT exempt, VAT exemption for an intermediary services is not usually possible.

3. VAT assessment issued by HMRC out of time?

In the case of Conservatory Insulations Northwest Limited (CIN), the dispute arose following the submission of an error correction notice (ECN) by CIN on 15 July 2022, relating to several VAT accounting periods. The VAT sums involved totalled £54,468. HMRC automatically acknowledged receipt of the ECN by HMRC on the same day. The ECN was subsequently lost or misfiled by HMRC. A replacement was sent on 22 May 2023 after CIN’s agent followed the matter up with HMRC.

An HMRC officer completed form V642 on 27 June 2023, but the form included a penalty inhibit requiring a countersignature by a more senior officer. This was an ‘unprompted’ error, CIN had identified VAT accounting errors and notified HMRC meaning that even a penalty for a ‘careless’ error could be mitigated to 0% of the potential lost revenue (PLR), in this case £54,468.

The countersignature was completed on 18 July 2023, and the VAT assessment was notified to CIN on 22 July 2023, showing tax due of £54,468 and interest of £5,044.83.

The only issue between the parties was whether the VAT assessment was raised within the statutory time limits, i.e. within one year of HMRC having “evidence of facts sufficient” to justify the making of the VAT assessment. CIN appealed to the Tribunal on the grounds that the assessment was made on either 18 July 2023, when the counter-signature was complete, or 22 July 2023, when the assessment was issued. Both of these dates are outside of the one year time limit. HMRC argued that the assessment was made on 27 June 2023 when an officer completed V642, within the one-year period.

Relying on extensive case law, the Tribunal confirmed that where HMRC’s own internal processes require senior approval, the time limit clock stops only once that process is complete, i.e. the assessment was made on 18 July 2023. Given that the initial ECN was submitted on 15 July 2022, the assessment was out of time and the appeal was allowed.

Constable VAT comment: This case is a significant reminder that HMRC must strictly comply with statutory time limits and its own internal procedures when issuing VAT assessments. For taxpayers and advisors alike, it reinforces the importance of understanding both legal deadlines and HMRC’s administrative processes when considering appeals, reviews or challenging assessments. We are surprised that HMRC took this case and argued such a technically weak point. Perhaps HMRC hoped that CIN would back down and not pursue an appeal to the FTT. It is also important to note that HMRC applied for CIN’s appeal to be struck out on the basis that either the FTT did not have the jurisdiction to hear the appeal or there was no reasonable prospect of CIN’s appeal succeeding. Thankfully, the FTT refused this application. It is not clear why HMRC should adopt this approach, and it could have withdrawn from the appeal process if it did not want this matter to be in the public domain. If we consider the position here, we wonder what HMRC has achieved. CIN has incurred the time, cost and effort of behaving as HMRC expects of reasonable taxpayers yet HMRC’s actions accomplished nothing. The UK exchequer has lost just over £59.5k in funding (VAT and interest) that was notified as being due by a taxpayer, but because of inefficiencies and failings on HMRC’s part those sums are lost. In addition, CIN has probably had to fund the resource of a hearing, and HMRC’s strike out application and its preparation for a hearing all come at a cost to it. Whilst misunderstandings do happen, whether that be in business, advisors or HMRC, it is a shame that, on this occasion, HMRC did not feel able to admit a mistake and let the matter rest rather than put all taxpayers to an unnecessary cost.       

4. Late payment penalty

In the case of ESC Studios Ltd (ESC) the First-tier Tribunal (FTT) overturned a £9,025.59 penalty issued for a late VAT payment, finding that ESC had a reasonable excuse for that late VAT payment, due to HMRC’s own delay in processing a large VAT repayment owing to ESC and failing that, the penalty would have been cancelled under ‘special circumstances’.

ESC, a film production company, submitted its March 2024 VAT return showing a £478,893.36 VAT repayment claim, a high amount driven by multiple productions being in progress. HMRC, not unreasonably, launched a routine pre-VAT repayment credibility check prior to authorising the VAT refund generated. This delayed the refund of VAT repayment owing for over six months, despite ESC providing all information requested by HMRC to the officer dealing with the enquiry promptly.

When ESC’s June 2024 VAT liability of £225,639.93 became due on 7 August 2024, it lacked the funds to pay VAT owing, not unreasonably expecting the earlier VAT repayment to be processed and refunded by then. The VAT owing was not paid until November 2024, once HMRC had finally completed its investigation and made the VAT repayment in respect of the March 2024 VAT return. The VAT refund originally reclaimed on the VAT return was not adjusted at all by HMRC. HMRC issued a late payment penalty on ESC in respect of its 06/24 VAT return. ESC agrees the VAT owing to HMRC was paid late; however, it appealed to the Tribunal on the grounds that it had a reasonable excuse for late payment, or penalty should be reduced due to ‘special circumstances’.

The FTT highlighted that ESC acted responsibly and diligently, cooperating promptly at all times. The late payment in respect of its 06/24 VAT return was due to HMRC’s delay, not negligence by the company and ESC’s belief that the March 2024 VAT repayment owing to it would arrive in time was reasonable and sincere. It was not realistic or fair to expect a small, growing business to borrow or absorb a shortfall of that significant size. Whilst ‘insufficient funds’ is generally not a reasonable excuse; it can become one when the insufficiency of funds are attributable to events outside the person’s control. The FTT had no difficulty in finding that ESC had a reasonable excuse in this case. The FTT also noted that, even without a reasonable excuse, it would have cancelled the penalty under the “special circumstances” rule, citing HMRC’s failure to consider the full context. The appeal was allowed.

Constable VAT Comment: This is an important case for taxpayers highlighting the benefits of acting proactively and diligently in dealings with HMRC, as a ‘reasonable taxpayer’ would be expected. One point worth flagging is that if ESC had doubts it will be able to cover its upcoming VAT liability, it had the option of contacting HMRC to agree a time to pay (TTP) arrangement. The FTT also flagged this quoting that “We do recognise that the Appellant could have sought a formal deferral of the due date of 7 August 2024 which, if agreed by HMRC, would have then allowed this penalty to be avoided. On future occasions, that might prove to be a sensible precaution for the Appellant to take”. Whilst ESC managed to successfully argue ‘reasonable excuse’, we would recommend TTP to be considered as a precautionary measure in all cases. Those points aside, it is also worth noting how HMRC behaved in this case which illustrate the double standards HMRC seemingly increasingly operates which, unfortunately, damages its reputation with businesses. In this case it was 132 working days after the 03/24 VAT return was submitted, and 101 working days after HMRC first met ESC that the VAT repayment originally reclaimed was paid by HMRC, without adjustment.

5. VAT exemption for private tuition

In the case of Rushby Dance and Fitness Centre and Others (the appellants) the scope of VAT exemption for private tuition was examined in the context of dance and fitness classes. The case involved four appellants each of whom challenged HMRC’s decision to deny VAT exemption and therefore register those businesses for VAT.

At the heart of the case was the application of the VAT exemption for “private tuition in a subject ordinarily taught in a school or university.” In order to fall within the exemption, there are two conditions that must apply:

1. The supply must be one of private tuition by an individual teacher acting independently of an employer; and
2. The tuition must be in a subject ordinarily taught in a school or university

Three of the appeals concerned bullet point 2, the Tribunal had to determine whether the classes constituted private tuition in a subject ordinarily taught in schools. The appellants offered various dance and fitness classes ranging from ballroom to Latin dance to branded fitness classes such as ‘Kettlercise’. The FTT drew a clear distinction between general dance education (which is indeed part of the national curriculum) and specific and unique dance styles or branded fitness programmes. The law does not require that private tuition mirror school teaching; however, tuition must still relate to subjects commonly taught in educational settings. There was insufficient evidence to show that the various dance and fitness classes supplied by the appellants were commonly taught in schools. These appeals were dismissed.

However, one of the four appellants, Dance Consultants International LLP (DCI) appeal was distinct in that the Tribunal had to determine whether the appellants, as members of an LLP, were acting on their own account and at their own risk, and hence independently of an employer. HMRC took the view that non-designated members of the LLP were responsible to the LLP as a whole so that the effect was as if the LLP was an employer and therefore VAT exemption cannot apply. The Tribunal disagreed, accepting that members provided tuition on their own account and at their own risk, satisfying the legal definition of “private tuition.” As such, DCI’s appeal against VAT registration was successful, although further clarification between DCI and HMRC will be needed to determine which specific classes qualify for exemption.

Constable VAT Comment: This decision reinforces a strict interpretation of VAT exemption for education while acknowledging that a broad subject like “dance” can encompass many sub-genres, not all of which automatically qualify. It also raises the question whether the intention of Parliament, at the time of implementing this legislation, was that such a detailed analysis is necessary at all times or is it simply that the  range of subjects now taught in schools and universities has expanded far beyond what it once was, and the legislation is now ‘out-dated’ to take this into account. This is a complex area, as demonstrated by these cases, and advice should be taken in situations where the VAT liability of supplies may be open to interpretation.     

6. VAT zero rating on supply of drugs

Clatterbridge Pharmacy Limited (CPL), a wholly owned subsidiary of the Clatterbridge Cancer Centre NHS Foundation Trust (the Trust), dispenses cancer medication to outpatients including intravenous and injectable drugs, which are often administered by nurses in patients’ homes. Drugs dispensed for ‘personal use’ are zero-rated unless supplied in hospital. The dispute in this case was whether cancer medications administered at home by healthcare professionals fall within ‘personal use’ and therefore qualify for zero-rating, or whether they should instead be standard rated as HMRC argued.

HMRC took the view that because the drugs were not self-administered, they were not for ‘personal use’ and thus did not qualify for zero-rating. The Tribunal disagreed, ruling that ‘personal use’ should be interpreted as use by a named individual, regardless of who physically administers the medicine. The drugs in question were dispensed under prescription for specific patients, labelled accordingly, and subject to strict regulatory controls that prevent those drugs from being used by anyone else. The Tribunal found that the definition of ‘personal use’ should not be limited to self-administration or private settings, as HMRC had argued.

The Tribunal also highlighted an apparent significant flaw in HMRC’s interpretation that drugs must be self-administered in order to qualify for zero rating. In certain cases, a nurse must issue a sign off confirming that a patient is able to receive and administer the drugs themselves. This means zero-rating would-be dependant on the nurse’s signing off procedure and could vary between standard rated and zero-rated supplies over time depending on the circumstances of the patient. The Tribunal called this a ‘potential absurdity’ and rejected HMRC’s argument. The appeal was allowed and the dispense fee was zero rated.

Constable VAT Comment: For pharmacies, NHS trusts, and healthcare providers engaged in outpatient or home-based treatment models, this decision provides welcome clarity as it reinforces that zero-rating can apply even when a drug is administered by a professional, so long as it is dispensed to a named patient outside a hospital setting. Whilst this case is unlikely to have an impact on most taxpayers, it does highlight the importance of a statutory interpretation which is especially important when dealing with zero rated supplies. We would recommend seeking professional advice whenever zero-rated supplies are involved and if there is any uncertainty regarding their VAT treatment. It remains to be seen if HMRC seeks leave to appeal the decision to the Upper Tribunal.

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.

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 31^st 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.

HMRC NEWS

HMRC’s One-to-many email to charities regarding non-business income
HMRC’s One-to-many team commenced sending out a brief educational email to small VAT registered charities with a turnover of up to £2million. The aim of the exercise is to raise awareness in the small VAT registered charities sector about the obligation of carrying out business/non-business apportionment calculations where necessary. If a charity has non-business activities (usually the free supply of goods and services), or receives income which is outside the scope of VAT, grant funding, for example, it may be required to consider a business/non-business apportionment when determining how much VAT incurred can be reclaimed. Constable VAT works with a number of charities and not-for-profit organisations across a wide range of sectors and we would be pleased to assist with any VAT queries on this or any other VAT matters.

Health professionals and pharmaceutical products (VAT Notice 701/57)
The above guidance sets out how to account for VAT on goods and services provided by registered health professionals, including doctors, dentists, nurses and pharmacists. HMRC has updated the guidance to add anaesthesia associates and physician associates to the list of health professionals in section 2.1.

Revenue and Customs Brief 3 (2024): VAT on cladding remediation work
HMRC has released Revenue and Customs Brief 3 (2024)(RCB3) which aims to clarify HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. To support this brief, HMRC also released Guidelines for Compliance GfC11 – Help with VAT treatment of remedial works, which provides more detail on the VAT treatment of remediation works, including HMRC’s policy on what constitutes snagging, and includes examples of how to apply HMRC’s rules on the VAT treatment of remediation work and the recoverability of input tax incurred.

CASE REVIEW

Upper Tribunal

1. Tour Operators Margin Scheme (TOMS)

In this case, the appellant, Sonder Europe Limited (Sonder), leased self-contained apartments from third party landlords, it then granted licenses to corporate and leisure travellers to occupy the furnished apartments, usually for around five nights. Sonder accounted for VAT only on its profit margin in accordance with TOMS, i.e. the difference between the total amount charged to travellers and the cost to Sonder payable to the third-party landlords. Given that no input VAT was incurred on the cost from third party landlords, accounting for output VAT due under TOMS was more beneficial to Sonder than standard VAT accounting. HMRC argued that Sonder’s supplies did not fall within TOMS and output VAT is due on the entire consideration received from customers and therefore assessed Sonder to VAT in the sum of £252,229. The VAT assessment was appealed and the FTT held that the supplies fell within TOMS. Our summary of the FTT decision can be read here.

HMRC appealed the FTT’s decision to the Upper Tribunal (UT) and the question for UT to determine was whether the supplies received by Sonder from third party landlords were supplied onwards for the benefit of travellers without material alteration or further processing. HMRC’s position was that a supply, where a taxpayer acquires an exempt supply and then makes a taxable supply of travel facilities, cannot fall within TOMS. HMRC also raised the point that Sonder acquired interests in lands for terms of several years (up to ten years in some cases) but supplied short term holiday accommodation.

The Tribunal considered both parties submissions; however, it agreed with HMRC. The UT accepted the FTT’s conclusion that there were no material alterations in respect of the apartments; however, the FTT focused solely on any physical alterations to the supply such as furnishing and decorating when making its decision. The UT concluded that the FTT erred in law by not comparing the alterations to the full bundle, including the rights and interests in land. It concluded that the service which was supplied by Sonder to the traveller was materially altered from that which was supplied by the third party landlord to Sonder. Sonder acquired long terms leases usually 2-10 years, whereas it made supplies of short term holiday accommodation. The travellers could not directly purchase short term holiday accommodation from the landlords therefore there must have been a material alteration to the actual supply made.

Constable Comment: In this case, the Upper Tribunal disagreed and therefore overturned the FTT’s decision, meaning Sonder’s appeal against the assessments is dismissed and VAT is due on the total consideration received. As no input VAT was incurred on the leases from third party landlords, the VAT liability to Sonder is significantly more compared to the VAT due under the TOMS. The UT concluded that the FTT focused solely on the physical alterations to the accommodation in isolation, not giving thought to the fact that the supplies bought in were VAT exempt long leases, but Sonder was making supplies of short-term taxable holiday accommodation, meaning there must have been a degree of alteration, a short-term licence to occupy for a couple of days being different to the long-term leases supplied to Sonder by the property owners. On that basis, it was concluded that Sonder was making its own in-house supplies to travellers which falls outside the TOMS. It will be interesting to see whether Sonder decided to appeal the case further, and this decision is obviously a boost to HMRC.

2. Evidence to support input VAT claim

FS Commercial Ltd (FSC) submitted a VAT repayment return in respect of the VAT accounting period ending 31 August 2018 (08/18). HMRC carried out a pre-VAT repayment credibility check prior to authorising the VAT refund requested.

Correspondence ensued but, in headline terms, FSC did not provide the information specifically requested by HMRC, in particular invoices from suppliers supporting an entitlement to reclaim VAT in respect of supplies received.

In February 2019 HMRC raised VAT assessments in accordance with section 73, VATA 1994. This part of the law allows HMRC to raise VAT assessments and reads ‘Where a person has failed….to keep any documents and afford the facilities necessary to verify such returns…..they may assess the amount of VAT due from him to the best of their judgment and notify it to him’. HMRC’s preferred decision was to raise VAT assessments totalling £19m in respect of VAT accounting periods 05/16 to 11/18 on the basis that there was insufficient evidence to support the claims to input VAT.

HMRC’s alternative decision is to issue VAT assessments of £15m in relation to VAT accounting periods 11/16 to 11/18 because FSC had not provided satisfactory evidence of payment to suppliers.

A decision of the FTT released in July 2023 (we cannot see that this decision was reported) seems to have focussed on the scope of its jurisdiction. When FSC prepared its case for a hearing at the FTT it sought to include ‘tens of thousands of invoices in its List of Documents’, presumably on the basis to evidence its right to deduct input VAT.

HMRC objected to this approach on the basis that the FTT’s jurisdiction was supervisory, and these documents had not been given to the HMRC decision maker and were not available to the officer when making the decision to raise VAT assessments. HMRC argued that these invoices were irrelevant to the substantive issue that the FTT had to decide i.e. was it reasonable for the HMRC officer to refuse an entitlement to input VAT deductions with the evidence presented and to hand at the time of the enquiry, and the decision to raise VAT assessments was made.

The FTT concluded that it did not have the legal power to consider new evidence presented by FSC to support its input VAT claims. The FTT decided that based on the evidence available to the officer at the time the decision to assess was made there were reasonable grounds for HMRC to refuse to allow the input VAT claimed. The VAT assessments were upheld. FSC appealed to the UT which confirmed its agreement with the decision of the FTT.

The UT decision includes a strong and forceful statement at paragraph 123 which we have reproduced in its entirety below:

‘We agree with Mr Watkinson (counsel for HMRC) that the operation of the VAT system is not a game to be played by taxpayers. When HMRC requests or requires that a taxpayer produces a valid VAT invoice in support of its claim to input tax deduction, it is doing nothing more than enforcing the European and domestic law that requires that such an invoice be held at the time of the exercise of the right to deduct. Where the taxpayer refuses a lawful and reasonable request, it puts itself in a position whereby the claim to input tax deduction is then a matter for the discretion of HMRC. If HMRC exercises that discretion against the taxpayer, the taxpayer cannot then, on appeal to the FTT, produce the invoice, as a surprise or ambush, even if it truly held the invoice all along, and so side-step the exercise of HMRC’s discretion’.

Constable comment: This is an interesting decision as we have dealt with cases where HMRC has, in the absence of supplier invoices, allowed input VAT recovery on the basis of satisfactory alternative evidence, a taxpayer usually incurs VAT to support onward taxable outputs, and HMRC generally exercises a degree of discretion, in our experience at least. The decision also reinforces that when dealing with HMRC it is important that any agreed deadlines are met. If there are problems collating information requested by HMRC, it is important for taxpayers to deal with matters proactively and engage with HMRC and seek to agree an extension of time to provide the information requested. A decision of the UT of this nature does, perhaps, give HMRC the opportunity to take a stricter approach in similar circumstances, moving forward; however, we hope that HMRC will continue to take a pragmatic approach and make decisions on a case-by-case basis.   

First-Tier Tribunal

3. VAT zero rating: Sports drink

This appeal concerned three powder based products supplied by Global by Nature Limited (GBN). The products (Sunwarrior Classic, Plus and Warrior) were powder based and could be used as a food supplement; however, the generic impression from marketing and packaging is that the products are primarily used for preparation of drinks. GBN submitted an error correction notification (ECN) to HMRC for overdeclared output VAT in relation to these products, taking the view, they were zero rated food items.  HMRC rejected part of the ECN on the basis that the products were ‘sport drinks’ and therefore excluded from zero rating under Item 4A of Group 1 Schedule 8 VATA 1994. The decision was upheld following a statutory review, and GBN appealed to the FTT.

There is no statutory definition of ‘sports drink’ in VAT legislation. With regards to the interpretation of Item 4A, HMRC’s position was that all drinks advertised or marketed as designed to enhance physical performance, accelerate recovery after exercise or build bulk were “sports drinks” as long as there was a reference in the advertising and marketing to “sports”.

GBN adopted a two-stage test, arguing it was first necessary to establish whether a product was a “sports drink”, and only in the case if it was, the second stage was to decide whether it was advertised or marketed as set out above in HMRC’s interpretation. The FTT agreed with GBN’s two stage approach and went on to consider whether the products are ‘sport drinks’.

The FTT found that the meaning of a ‘sports drink’ in Item 4A is a drink which contains significant amount of carbohydrate (usually sugar) and may contain salts (such as sodium and potassium). Having considered the ingredients, the FTT noted that the products contained a maximum of 5% carbohydrate and therefore it cannot be a ‘sports drink’. On that basis, the products cannot fall within Item 4A and therefore are zero rated for VAT purposes. The appeal was allowed.

However, the Tribunal also went on to consider the products’ VAT liability, in the alternative view if HMRC’s interpretation of Item 4A was correct, rather than the two-stage approach, meaning as long as the products were advertised and marketed to:

• Enhance physical performance
• Accelerate recovery after exercise; or
• Build bulk

then any drink will be standard rated in accordance with Item 4A, even if it does not fall within the meaning of ‘sports drink’. The FTT reviewed websites, the customer base, the product catalogue and the overall brand and concluded that the ‘Classic’ and ‘Plus’ products do not satisfy those requirements, meaning these are zero rated in any event. However, the ‘Warrior’ product was advertised and marketed accordingly to fit into Item 4A, meaning in the alternative event that HMRC’s interpretation of Item 4A is correct then this product only would be standard rated.

Constable Comment: This was an interesting case where the Tribunal considered an alternative decision in the event that its statutory interpretation of Item 4A were to be wrong, and this alternative decision found one of the three disputed products to be standard rated. However, as long as the FTT’s interpretation of Item 4A stands, meaning a product must be a ‘sport drink’ in order for Item 4A to apply, it suggests all products are zero rated because they cannot be a sport drink due to their negligible levels of carbohydrates. On that basis, no further thought needs to be given to the advertising and marketing of the products. Zero rating food or similar items often attracts queries and challenges from HMRC; and the sums involved can be significant. In this case, GBN originally submitted an ECN in February 2021 in the sum £1,246,566 owing (covering the period 1 October 2016 to 30 September 2020), this seems to have been adjusted and a revised figure of £798k is mentioned in the decision. When making similar supplies we would recommend seeking professional advice to ensure that the correct VAT liability of the product is identified, and to avoid potential disputes with HMRC. Constable VAT has relevant experience in dealing with zero rated food items and would be pleased to assist with any queries.

4. VAT: Legitimate expectation

 In the decision of Treasures of Brazil (TOB) the taxpayer applied to VAT register with effect from 1 October 2022 on 21 September 2022. Following receipt of the VAT registration application HMRC emailed the appellant on the same day (21 September 2022) and specifically advised TOB ‘you should wait until your VAT registration is confirmed before you charge customers for VAT’. The taxpayer, not unreasonably, took this to mean that it should only charge customers VAT once it had conformation its VAT registration had been approved, and it had received its VAT registration number.  

 TOB received a letter from HMRC confirming its VAT registration application had been approved and confirming its VAT registration number. This letter was dated10 October 2022; however, the letter was not received by TOB until 28 December 2022. HMRC later confirmed that its systems show that the letter was, in fact, issued on 17 December 2022, no explanation was offered by HMRC as to why this letter was dated incorrectly, and this point was not pursued by the FTT. Similarly, HMRC did not explain why it took almost three months to process the VAT registration application.

TOB submitted its VAT return for the period 1 October 2022 to 31 December 2022 (12/22) which declared no output VAT and requested a VAT refund of £4.5k, which HMRC queried. HMRC subsequently assessed for VAT due (in a letter dated 23 May 2023) of £14,256.95 on standard rated sales (TOB supplies jewellery and bags) made from 1 October 2022, TOB’s effective date of VAT registration (EDR). In addition, the input VAT figure was increased by HMRC to £7,744.93, meaning a net VAT liability owing to HMRC of £6,512.02, rather than a refund of VAT TOB expected.

TOB appealed this decision (that it owed £6.5k VAT to HMRC) to the First-tier Tribunal (FTT) and HMRC defended its behaviour. HMRC argued that the FTT does not have jurisdiction to hear a case on legitimate expectation. This led the FTT to consider 3 points:

(1) Does this Tribunal have jurisdiction to consider matters of legitimate expectation in the present appeal?

(2) Did the Appellant have a legitimate expectation?

(3) If the Appellant did have a legitimate expectation, what is the effect on the assessment?

The FTT considered each point in turn and concluded that it does have jurisdiction to consider TOB’s legitimate expectation claim. It also agreed with TOB that it had a legitimate expectation finding that HMRC’s instruction email was clearly intended to contradict and override HMRC guidance (accompanying notes to the VAT registration application and VAT Notices) and there was no cross reference in HMRC’s email to other guidance and the email gave no detail or qualification.

TOB can only rely on its legitimate expectation argument if the outcome produces an unfair result. The FTT found that this was the case. TOB could have charged its customers VAT from 1 October 2022; however, on 21 September 2021 HMRC specifically instructed it not to do so. This meant that TOB would have to account for output VAT from its own funds because HMRC gave incorrect advice. The appeal was allowed and the assessment set aside.

Constable comment: We are pleased that TOB was successful in its appeal as the legitimate expectation hurdle can be a difficult argument to win; however, the facts in this case seem overwhelmingly in TOB’s favour. In terms of HMRC’s behaviour, it is not clear why resource would be expended when HMRC’s advice in its instruction email to the taxpayer was clearly incorrect. We would imagine that this case has cost more to defend than the VAT at stake, and no doubt caused TOB a considerable amount of worry and stress. This case was not heard until 19 July 2024, and the decision released on 17 October 2024. It is disappointing that HMRC’s SOLS team did not consider the facts and take a pragmatic approach, looking at the bigger picture, rather than proceed to a hearing and defend HMRC’s position on the basis that the FTT did not have the jurisdiction to consider a case dealing with legitimate expectation. The other important point that this decision highlights, which may have not been in the wider public domain had HMRC taken a more reasonable approach, is the fact that HMRC official correspondence contains worrying inaccuracies. The decision reads as follows at paragraph 14. ‘The letter from HMRC confirming VAT registration with effect from 1 October 2022 was dated 10 October 2022. HMRC accept that the date on the letter was incorrect. HMRC’s systems indicate that the letter was issued on 17 December 2022. Ms Brambila gave evidence that the letter was not in fact received until 28 December 2022. We accept Ms Brambila’s evidence and find accordingly.’ It is obviously a concern that a letter from HMRC, which may impact a taxpayer’s statutory appeal rights, is not dated the day that document is finalised and issued but backdated to a date over two months earlier. We would expect that HMRC had robust systems in place to prevent such mistakes happening; however, the evidence that has come to light in this case only serves, naturally, to make taxpayers and advisors wonder how many times this has happened before. We have dealt with cases where it has seemingly taken a considerable amount of time for HMRC postal correspondence to be received by us or clients and emailed correspondence would appear to be the way forward and offering a clear audit trail.

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.

HMRC NEWS

VAT on private school fees
Following the release of the Technical Note on 29 July 2024, it has been confirmed that from 1 January 2025, school and boarding fees for private schools will be taxable at the standard rate of VAT (20%). Further to the technical note, HMRC has now released new guidance as follows:

• Check if you must register for VAT if receive private school fees
• Charging and reclaiming VAT on goods and services related to private school fees

The newly published guidance provides information on who must register for VAT and when, considering the date of payments received and the VAT registration threshold. The guidance also covers voluntary VAT registration with some commentary on how to register, including group VAT registrations. HMRC also provides some useful commentary around charging VAT on supplies of education in particular scenarios such as welfare, grants, bursary payments, local authority placements etc. In addition, the guidance briefly covers input VAT recovery following VAT registration.

Help with VAT compliance controls – Guidelines for Compliance GfC8
These guidelines are for UK VAT registered businesses who use invoice accounting, meaning they generally account for VAT when invoices are issued and received. The guidelines set out HMRC’s recommended approach and are designed to help you understand HMRC’s expectations as you plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by your business. The guidelines and control points:

• help you make informed decisions and consider if you have sufficient controls within your systems and processes
• should be applied to reflect the complexity and scale of your own business
• are not intended to be exhaustive or expected to apply equally to all businesses
• help you identify risks and enable you to develop a robust strategy to reduce those risks

Qualitative research on VAT registration
HMRC commissioned Ipsos, an independent research agency, to conduct qualitative research to explore perceptions and experiences of VAT registration. The research also examined linked barriers or pressures on businesses in respect of growth. Similar research was also carried out for VAT deregistration which can be found here. The research around registration and de-registration contains awareness, knowledge and perception and experiences in dealing with HMRC.

The Value Added Tax (Caravans) Order 2024
This newly published guidance is likely to be of interest to manufacturers, retailers and suppliers of residential caravans and people who buy them for residential use. The conditions for the zero rate of VAT to apply to a residential caravan include the requirement for the caravan to be manufactured to standard 3632 issued by the British Standards Institution (BSI). The BSI reviewed and updated this standard in 2023, and it was therefore necessary to amend the Value Added Tax Act 1994 (VATA) to ensure that caravans manufactured to the new standard can qualify for the zero rate. The measure also zero rates caravans that meet new versions of the same standard which may be issued in future by the BSI.

Claim a VAT refund as an organisation not registered for VAT
Certain organisations which are not VAT registered can make a claim for a VAT refund by submitting a VAT126 to HMRC. This usually applies to local authorities and similar bodies, museums and galleries that offer free admission etc. HMRC has updated their guidance to confirm that the VAT126 can now be completed online.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme and details 6 new additions and 2 removals.

CASE REVIEW

Upper Tribunal

1. VAT: Prompt Payment Discount

In this case, TalkTalk Telecom Limited (TTL) appealed against the FTT’s decision to uphold HMRC’s assessment in the sum of £10,606,226 for underpaid VAT during a four month period between 1 January and 30 April 2024. During this period TTL offered a ‘Speedy Payment Discount’ (SPD) which was a 15% discount on its services if their monthly bills were paid within 24 hours.

At the time, in accordance with the legislation, if the terms and conditions (T&Cs) allowed a discount for prompt payment, the consideration was taken as reduced by that discount whether or not the discount is taken up. TTL accounted for output VAT on the discounted amounts even though only 3% of their customers paid within 24 hours. HRMC took the view that the T&Cs did not allow for prompt payment discount and therefore VAT was due on the full amounts and raised assessments accordingly. TTL appealed to the FTT, however the decision was upheld. The summary of the FTT’s decision can be read here.

TTL appealed to the Upper Tribunal (UT) however the decision was once again upheld. The UT has concluded that the T&Cs did not include a discount for prompt payment, but rather agreed, on a month by month basis, to accept a lesser sum if paid within 24 hours.  For those customers who did not pay within 24 hours, the T&Cs did not change at all. Therefore, the supplies to any customer not taking advantage of the discount, was not supplied on T&Cs which allowed for a prompt payment discount, as a result output VAT is due on the full amount (except in the limited cases where the discount was taken up) and the appeal was dismissed.

Constable VAT comment: This case considered previous legislation which were revised since and is therefore historical interest only, however, it acts as an important reminder that for VAT purposes HMRC will consider both the contractual agreements as well as the commercial reality of a supply.

First-Tier Tribunal

2. VAT penalties: Reasonable excuse

This is the first case concerning the new point-based penalty system and penalties for late payment of VAT introduced from 1 January 2023. In this case, the appellant,  Sandra Krywald, engaged the services of a bookkeeper to prepare and submit VAT return figures to HMRC, however, the appellant was reluctant to sign VAT returns due to doubts of its accuracy. The appellant was in contact with HMRC and was told that she is required ‘opening and closing balances’ to submit a VAT return. The appellant discussed this with the bookkeeper who then resigned ceasing to act for the appellant. Subsequently, the appellant engaged the services of a VAT specialist who confirmed that HMRC’s advice was incorrect. VAT returns were then prepared and submitted retrospectively with the aid of a VAT specialist.

However, HMRC has charged penalties for late payments of VAT and issued penalty points for late submission of VAT returns. The appellant has appealed to the Tribunal arguing it had a reasonable excuse on the grounds that she was entitled to, and did, rely on the bookkeeper to supply her with competent staff which they failed to do and once she realised that the bookkeepers did not provide accurate figures, she made every effort to resolve the situation including contracting HMRC who also provided misleading information.

HMRC argued that it is statutorily provided that reliance on another person to do anything is not a reasonable excuse, therefore the penalties were correctly charged.

The Tribunal had no difficulty in deciding that the appellant had a reasonable excuse concluding that the appellant took reasonable care to avoid the failures by the firm, and by HMRC, and then remedied the failings without unreasonable delay once the excuse ceased. The appellant made reasonable efforts to rectify the failings of various other parties on which she relied on. Once it was established that HMRC provided incorrect advice, with the assistance of a VAT specialist the position was promptly rectified without unreasonable delay and therefore the appellant had a reasonable excuse.

Furthermore, the Tribunal also went on to confirm that even if it was not a reasonable excuse, the penalty would have been reduced to nil due to ‘special circumstances’. The combination of failings from the bookkeeper together with HMRC’s incorrect advice leading to far more work than is required, has led to the late submissions and payments, and the Tribunal considered this to be special circumstances. The appeal was allowed.

Constable Comment: This is a helpful case demonstrating how a person can succeed on the ‘reasonable excuse’ argument. In addition, it is particularly helpful given that the new penalty system was considered.  Although it is not a reasonable excuse to rely on third parties such as bookkeepers and advisors, it becomes a reasonable excuse if the taxpayer ‘takes reasonable care to avoid the failures by the firm, and by HMRC, and then remedied the failings without unreasonable delay once the excuse ceased’.

In this case, the appellant made significant efforts to attempt to rectify failings by her bookkeepers, as well as failings on HMRC’s behalf. The VAT returns were submitted promptly once these failings were remedied, demonstrating a reasonable excuse. It is of note that HMRC failed to consider a “Special Reduction” either, HMRC seldom consider this provision in earnest.

It appears that reliance on a competent VAT advisor was essential in this case to rectify the issues and has helped the appellant to succeed with the reasonable excuse argument, with the Tribunal concluding ‘Taking this advice is in our view taking reasonable care to avoid HMRC’s failings.’ Taking professional VAT advice is often seen as ‘reasonable’ and therefore mitigates the risks of any penalties from HMRC for ‘careless’ errors.

3. Input VAT recovery on legal fees

This case concerned Visual Investments International Limited’s (Visual) appeal against HMRC’s refusal to accept input VAT claims. Visual’s main business activity was investing in start-up businesses and providing consultancy services to help them reach their full potential. Prior to such supplies, Visual incurred professional fees on legal proceedings protecting their investments as it has been denied the value of their shares in two companies together with the dividend payments. It was confirmed that the business activities of Visual would restart upon receipt of the money arising from the legal proceedings therefore the input VAT incurred on legal fees have a direct and immediate link to its taxable supplies of management consultancy. HMRC did not accept this argument and denied input VAT accordingly.

The First-Tier Tribunal (FTT) agreed with HMRC concluding that the legal fees did not have a direct and immediate link to making taxable supplies of management consultancy. The purpose of the legal services was the realisation of value of by selling the equity and making a large profit. The invoices provided the following narrative: “Shareholder dispute relating to the fraudulent removal of assets from Streaming Investment PLC”.

In addition, the FTT also concluded that Visual was not the sole recipient of the legal services. There were three recipients of the legal services and therefore an apportionment would have been required even in  the event that the FTT concludes there was a direct and immediate link between the legal services and taxable supplies. However, that was not the case and the appeal was therefore dismissed.

Constable VAT comment: This case was determined in accordance with its own specific facts and it is unlikely to directly impact other taxpayers, however it offers a careful analysis of the ‘direct and immediate link’ principle which is a key aspect of input VAT recovery. If you or your business incurred input VAT and there is ambiguity whether it is recoverable, we would recommend seeking professional advice to ensure input VAT is not over-claimed as in certain cases this may lead to assessments, careless penalties and interest amounts due to HMRC.

4. VAT DIY Claim eligibility

This case concerned a refund claimed under the DIY Housebuilders Scheme. The DIY Scheme allows private individual housebuilders to reclaim input VAT incurred on the goods and services purchased on the construction or conversion of dwellings. In this case, the appellant, Brian Lawton, converted a barn into a dwelling, however, this was done in two phases with separate planning permission, one being for ‘conversion of a barn to a dwelling’ and the other ‘extension to existing barn conversion’. Due to uncertainty caused by the COVID pandemic, the appellant sought a completion certificate in relation to the first phase of constructions and submitted a DIY claim to HMRC. This was an eligible claim which was not disputed.

Subsequently, the remainder of the conversion was complete, and the appellant submitted a second DIY claim to HMRC in the sum of £2,582.38. HMRC refused this claim on the basis that only one single VAT DIY claim is allowed in relation to one conversion. The appellant argued that due to the financial and economic impacts of the Covid pandemic, the restrictions which followed and its impact on the building industry, and the limited availability and increased costs of labour and materials, he decided it would be sensible to obtain a completion certificate for the part of the project that was completed, even though the entire project was not complete and habitable at this stage. However, given that a completion certificate was issued, in accordance with HMRC guidance, a DIY claim had to be submitted within 30 days, hence the appellant submitted two DIY claims, in phases.

Whilst the Tribunal was sympathetic towards the appellant, it concluded that the second DIY claim related to the extension of an existing dwelling as opposed to the conversion, which is ineligible for a refund under the DIY scheme. The appeal was dismissed.

Constable Comment: This case is concluded on the specific facts and its unique circumstance therefore its unlikely to impact other taxpayers directly, however it certainly acts as an important reminder that submitting a DIY claim involves various rules and conditions and if these are not met and complied with, HMRC may refuse any refunds due, therefore, we advise all statutory conditions are considered carefully well in advance of completion and submitting the claim. HMRC apply little or no discretion when reviewing claims and expend a great deal of resource scrutinising such claims.

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.