In this newsletter we look at the key developments in the VAT world over the past six months that will have significant practical implications for a range of businesses, charities and other organisations.
VAT on Sales and Outputs
Packaging and Hampers
A possible opportunity to revisit overdeclared VAT on hampers and other products with packaging that goes beyond what is “normal and necessary” arises from a tribunal decision.
In Clearwater Hampers the taxpayer successfully argued that VAT did not need to be accounted for separately on a lidded hamper which contained food and drink subject to different VAT rates.
The decision directly contradicts HMRC guidance and is an opportunity to revisit the treatment of hampers and other packaging that HMRC regards as more than “normal and necessary”.
Meal deals, Promotional Packages and Other Mixed VAT Rate Transactions
Businesses offering meal deals, promotional packages and involved in other mixed VAT liability transactions must be aware of an important case that could be both an opportunity and a risk depending on their circumstances.
In Queenscourt Ltd the Upper Tribunal held that dip pots supplied as part of a KFC meal deal were separate zero-rated supplies, paving the way for a repayment to the taxpayer.
The reasoning applied by the Tribunal was surprising to many VAT advisers and is out of step with common practice on many packages of goods and/or services.
In light of the decision, businesses and other organisations should review the VAT treatment applied to mixed VAT liability transactions. There may be specific opportunities for businesses offering meal deals and promotional packages for a single price.
Public EV Charging
HMRC is digging in its heels on the VAT liability of public EV charging but businesses and other organisations earning charging income as principals should consider how to protect their positions.
In Charge My Street Ltd the First-tier Tribunal held that electricity supplied via public EV charging points could in principle qualify for the reduced rate of VAT.
HMRC subsequently announced that it would be appealing this decision and its policy remained that this charging remained standard-rated (20%).
Affected taxpayers should look at ways of protecting their position given the ongoing litigation. The opportunity could extend beyond traditional EV charging businesses to any business/organisation which earns income as principal for the supply of electricity at a charging point.
Grant Funding
An important case on grant funding in the education sector must be considered by further education colleges but also any charities/organisations in receipt of grant funding. HMRC is currently considering its policy response.
The Court of Appeal delivered its Judgment in Colchester Institute Corporation, holding that grant funding for education supplied by a further education college was “third-party consideration” for VAT purposes rather than a “non-business” activity.
The technical ramifications of this conclusion are varied but there are significant risks to the FE sector including the loss of VAT reliefs on construction costs and fuel and power.
For now, HMRC has confirmed it is not appealing the Judgment but is reviewing its policy and any policy change will not be retrospective. FE colleges can therefore rely on non-business treatment unless they have already sought to apply the Colchester Judgment. They should, however, consider their positions carefully.
Whilst there is not direct read-through to other arrangements for grant funding, where charities receive grant funding it would be prudent to review arrangements and model risk.
Food Supplements
An important case is on the VAT treatment of food supplements is on the horizon and could present an opportunity for anyone selling supplements that are currently regarded as subject to 20% VAT.
A procedural case was heard in Healthspan Ltd in relation to a dispute about the VAT treatment of some 316 products loosely categorised as “supplements”. Examples include turmeric tablets, cod liver oil, fish collagen, vitamin C, folic acid, herbal medicines, probiotics and enzymes.
The central question – which is yet to be considered by the Tribunal – is whether these supplements can be zero-rated as food.
Any business involved in the sale of supplements should take note of this ongoing litigation and consider taking steps to protect their position.
Temporary Reduced-Rate for Children and Family Food and Leisure
A temporary 5% VAT rate raises difficult VAT issues that must be swiftly addressed by many businesses in the leisure and hospitality sectors.
A time-limited reduced-rate of 5% will be introduced between 25 June to 1 September 2026. This measure is branded as the “Great British Summer Savings 2026”.
In broad terms, the measure is targeting at children’s menu meals in restaurants and family leisure activities (e.g. theme parks, cinemas and shows).
The short lead-in time and duration presents complex challenges for affected business both in terms of their VAT coding and VAT liability decisions. Affected businesses must work quickly to understand their obligations.
VAT on Purchases and Inputs
VAT Recovery Without an Invoice
Businesses and organisations should be aware of developments in HMRC’s policy on VAT recovery without a VAT invoice. There may be an opportunity to revisit scenarios where VAT has not been recovered on the basis an invoice was not held.
In Athena Luxe the First-tier Tribunal held that an HMRC officer ought to have exercised their discretion to allow VAT recovery on the basis of “alternative evidence” despite a taxpayer not holding a valid VAT invoice in respect of some purchases.
After this decision (and others) HMRC updated its internal guidance in VIT31200. An additional section of the guidance now makes clear that where “the taxpayer can provide satisfactory alternative evidence of the supply and there are no grounds to suspect abuse or fraudulent intent on the part of the claimant, HMRC staff should normally exercise their discretion to allow the taxpayer to deduct the input tax.”
These developments may present an opportunity to revisit scenarios where VAT has not been recovered (or recovery was denied) on the basis that a VAT invoice was not held.
Finance Commissions and Partial Exemption
Recovery of VAT for partly exempt businesses is a minefield. A new decision could be good news for retailers earning VAT exempt commissions from finance or insurance.
In Littlewoods the First-tier Tribunal held that an online retailer was entitled to recover VAT in full on product photography costs.
HMRC’s contention that a restriction to VAT recovery was needed because the retailer earned some VAT exempt finance commission was rejected. The Tribunal also criticised an earlier decision which reached the opposite conclusion in similar circumstances.
Following the decision retailers earning VAT exempt commissions from finance or insurance should revisit their attribution of costs for partial exemption purposes to ensure that they are correctly recovering VAT.
Interest Income and Partial Exemption
Law firms earning interest income on client funds must be aware of HMRC activity in this area and the risk that they should be restricting VAT recovery on costs.
HMRC has continued to target law firms to argue that the VAT exempt income they earn on client funds means that they should suffer a restriction on their VAT recovery (e.g. in relation to overheads).
It is understood that there is ongoing litigation on this point. It is also understood that HMRC should accept that where a solicitor does not have the right to retain the interest (i.e. it does not belong to them) then the income should not impact their partial exemption position.
Law firms should ensure that they have considered their approach and any associated risks in light of HMRC’s activities.
VAT Recovery on Sale-Side Deal Fees
Long-running litigation on VAT recovery on sale-side deal fees has concluded with a loss for the taxpayer. Any business selling shares and incurring VAT on professional fees needs to be aware of the VAT recovery risks.
Long running litigation on VAT recovery on share sale deal fees ended at the Supreme Court. In Hotel la Tour the Court found for HMRC that VAT on the deal fees in question could not be recovered because it was used for a VAT exempt share sale.
Businesses that have incurred VAT in relation to business sales/restructures over the last four years should take note and ensure that they have correctly analysed their entitlement to VAT recovery. The position should also be considered carefully for any future sales/restructures.
Despite the Judgement, there may sometimes still be scope to recover VAT on some deal-related costs. However, this will require a careful and fact-specific enquiry as to the nature of those costs and the wider circumstances.
Compliance and Penalties
Rising Reports of VAT Registration Number Hacking
Businesses and their accountants must be vigilant to a rise in reports of VAT registration number hacking and what they can do to prevent this.
There are an increasing number of reported incidents of VAT registration numbers being “hijacked”. Typically, a fraudulent government gateway account will be set up in the name of a newly registered business and repayment claims will be submitted to HMRC.
HMRC introduced new measures in January, requiring the VAT registration application reference number to be included when enrolling for VAT services. It is therefore imperative that this number is kept safe and secure. We can assist businesses affected by this kind of VAT fraud.
Importance of Supplier Due Diligence Records
Due diligence of suppliers can be critical to establishing a right to VAT recovery on costs. All businesses – but especially those working with labour, scrap metal, construction and electronic goods – should review their processes and records to ensure that they meet robust VAT requirements.
HMRC may seek to deny VAT recovery where a taxpayer “knew or should have known” that a transaction is connected with VAT fraud.
To mitigate the risk of fraud and to meet HMRC compliance requirements it is essential that businesses have a robust record of supply chin due diligence. This is particularly important in sectors commonly affected by VAT fraud which include (but are not limited to) labour, scrap metal, construction and electronic goods.
HMRC Challenges to Ecommerce, Takeaway and Food Businesses
Ecommerce, takeaway and food businesses must be aware of an uptick in HMRC activity apparently driven by analysis of online data.
We are seeing increased HMRC activity in the ecommerce, takeaway and food businesses where online data is being used to drive HMRC compliance and enforcement activity.
If you operate in these sectors and/or have been affected by HMRC’s activity, we can assist with the careful management of enquiries.
International VAT and Customs
Planned Changes to EU Ecommerce Package
Changes to EU customs duty rules may have a significant impact on businesses selling to the EU in low value consignments.
On 1 July 2026 the €150 customs duty threshold is removed so that all consignments will be subject to customs Duty. The threshold for using the iOSS for VAT will remain at €150
However, it will not be possible to apply item specific duty rates until the launch of the EU Customs Data Hub – expected in 2028. Until then a flat levy of €3 per item type (probably based on HS code) will be levied.
Example – consignment of 1 pair of jeans – levy = €3; consignment of 2 pairs of jeans – levy = €3; consignment of 1 pair of jeans and 1 shirt – levy = €6
In November 2026 the EU will introduce an “e Commerce” package handling fee of €2 per parcel (current proposed value). In 2028 the “Special Arrangements” will no longer be available. In 2028 the iOSS threshold will removed so that all sales, regardless of value, can be reported using iOSS.
The last two points are part of the EU’s desire to significantly increase the number of transactions covered by iOSS.