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.