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.