VAT quarterly update – Autumn 2025

Our VAT expert, Paula Mason explores the most recent updates to HMRC policies and case laws and the impact these may have on your VAT liabilities.

 Autumn 2025 Budget VAT update

Thankfully, the rumours that VAT registration thresholds would be reduced significantly did not materialise (this time round), however, there were a few VAT changes in the Budget that are worth highlighting.

VAT relief on donations of goods to charities:

If your business donates goods to registered charities either for distribution free of charge to those in need, or for using in the delivery of the charities’ services – then a new VAT relief will be available to you from 1 April 2026.

It follows a consultation in April 2025 and was confirmed in last month’s Budget that the relief will apply to goods valued up to £100 per item with up to £200 for essential electrical items such as laptops and white goods.

E-invoicing:

Also announced were plans for all VAT invoices to be issued in a specified electronic format from 2029.  Although an implementation roadmap for this won’t be published until the 2026 Budget.

VAT on private hire vehicle services

Following the March 2025 Upper Tribunal ruling of HMRC v Bolt Services UK Limited, it was confirmed in the Budget that suppliers will be excluded from the scope of the Tour Operators Margin Scheme from 2 January 2026 – apart from supplies made in conjunction with certain other travel services.

This means that VAT registered operators contracting as principals must account for VAT at 20% on the full passenger fare.

Change to cross border VAT grouping

Effective immediately, HMRC now considers that an overseas establishment of a business that’s VAT grouped in the UK should be treated as part of the VAT Group, even if it is located in an EU Member State that does not operate whole entity VAT Grouping.

So, where previous guidance was issued to confirm that VAT Groups may have accounted for VAT under the reverse charge mechanism, they may now be eligible to reclaim overpaid VAT via an Error Correction Notice.

VAT treatment of land intended for social housing

A consultation will be taking place on the reform of VAT rules to incentivise the development of land intended for social housing.

Late payment penalties

Finally, penalties for late payment of VAT will be increased with effect from 1 April 2027.

VAT Case Law updates

Import VAT

The case of TSI Instruments Ltd v HMRC (TC09676)

TSI repaired and calibrated scientific instruments for customers located around the world.

As they imported the goods into the UK in order to carry out their services, they paid import VAT when the goods entered the UK and reclaimed this as input tax on their VAT returns.

HMRC were of the opinion that they were not entitled to claim this input tax as TSI did not own the goods and they therefore issued assessments going back 4 years for just under £8.5 million.  TSI appealed to the First Tier Tribunal (“FTT”).

The FTT considered both EU and UK law which only allows import VAT to be reclaimed as input tax if the importer owns the goods or has the goods at their disposal, or if the cost of the goods is reflected in the price of the importer’s services.

As TSI did not own the goods and the value of the goods was not included in the price they charged for their services, the FTT ruled they were not entitled to treat the import tax paid as input tax and dismissed their appeal.

Note:  TSI could have avoided this expensive mistake by either taking advantage of Inward Processing Relief, meaning that no import VAT would have been payable or by the owner of the goods being the importer.

Key takeaways for SMEs

If you repair, refurbish, service, or process goods you do not own, you may be at risk of incorrectly reclaiming import VAT.

• To reclaim import VAT, you must own the goods, have them at your disposal, or include the value of the goods in the price you charge. You cannot reclaim import VAT simply because you paid it.
• Inward Processing Relief (IP) could be used as an alternative to avoid paying import VAT on goods you don’t own.
• Import VAT can be treated as input tax if the owner of the goods is recorded as the importer.

• Review contracts and import declarations to make sure they reflect the correct position.
• Speak to a VAT specialist if unsure about your position.

Input VAT

The case of SM Developments North West Ltd v HMRC (TC09665)

SM Developments North West Ltd (“SMDNWL”) were a building company incorporated in September 2018 and who started trading in March 2021. They exceeded the VAT threshold in August 2021 but were registered for VAT from 1 August 2022.

In their first VAT return, SMDNWL stated output tax of £21.6k, input tax of £68.6k and therefore claimed a repayment of £47k.  HMRC undertook a compliance check and requested further information to back up the repayment claim, including bank statements and copies of invoices.

Initially, HMRC issued a notice of assessment which increased the output tax to £123k and denied all the input tax claimed but, following a request for an internal review, the output tax was reduced to £16.5k.

However, the input tax continued to be denied as most of the input tax predated the effective date of VAT registration (“EDR”) and SMDNWL had not produced VAT invoices or suitable evidence to justify HMRC exercising its discretion to accept alternative evidence.

SMDNWL appealed to the First Tier Tribunal (“FTT”). But the FTT dismissed the appeal because:

• For any supplies where the time of supply predated the EDR, input tax was not entitled to be reclaimed as the goods had been consumed. SMDNWL did not produce any evidence to show that this was not the case.
• Where invoices were provided, they were considered not to be valid VAT invoices.

• SMDNWL couldn’t provide alternative evidence strong enough for HMRC discretion.

Therefore, SMDNWL were not entitled to the input tax claimed in the return.

Note:  It’s imperative that valid VAT invoices are retained on file to make sure input tax can be claimed.  If valid VAT invoices can’t be provided, HMRC will accept alternative evidence such as bank statements, purchase ledgers or VAT accounts at their discretion.

Key takeaways for SMEs

VAT compliance basics matter – especially for new or growing businesses.

• Pre-registration VAT suffered can only be treated as input tax on goods or services subject to certain conditions being satisfied.
• Valid VAT invoices must be retained for all purchases, pre and post registration.
• If valid VAT invoices are not available, HMRC may accept alternative evidence — but only if it proves the purchases were made and paid in full.
• Poor record keeping can lead to HMRC denying claims and raising assessments.

Partial Exemption

The case of Hippodrome Casino Limited v HMRC (EWCA Civ 1259)

Hippodrome Casino Limited (“HCL”) has a number of business activities.

Its principal activity at its five-floor venue in London is gaming which is exempt.  It also has eight bars, a restaurant, private dining and meeting rooms, conference and event areas, outdoor terraces, an entertainment and conference space, lounges and a theatre which are all taxable.  It is therefore a partially exempt trader.

They used a special method based on floor space utilised by each activity to apportion their residual input VAT, because they felt the standard method based on turnover did not give a fair and reasonable result.

HMRC disputed this, believing the standard method did give a fair and reasonable result and, in any event, HCL had failed to put forward an alternative method which would more accurately reflect the use of the various inputs.

HCL appealed to the First Tier Tribunal (“FTT”) who allowed the appeal, agreeing that a floor based special method was a more appropriate methodology to use. They dismissed HMRC’s arguments that there was dual use of the floor space allocated to the taxable hospitality and entertainment areas, i.e.. these areas were used for making both taxable and exempt supplies.

HMRC in turn appealed to the Upper Tribunal (“UT”) who allowed their appeal on the basis that the FTT had failed to address the issue of dual use.  They considered this a material error of law and therefore their decision had to be set aside.  The UT held that HCL had not shown that the floor space based special method provided a more precise measure of use than the standard method, and that the standard method applied.   So, HCL then appealed to the Court of Appeal (“ECWA”).

HCL’s appeal was then dismissed by the ECWA. HCL could not prove the special method gave a more precise result and, with the dual use of space, their calculation assumed that the taxable areas of the premises were only used by non-gamblers, which was not the case.

Note:  This case shows that the standard method can only be overridden if an alternative method can provide a more precise measure of the use of residual input tax between taxable and exempt supplies.

Key takeaways for SMEs

For those in hospitality, property, financial services, education, or charities, it is common to have both taxable and exempt income. So, caution must be taken when proposing a special partial exemption method.

• A special method can only be used if it gives a more precise and equitable result, and it must be demonstrated why it is more reasonable to use than the standard method.
• If activities are “dual-use”, it needs to be considered how the use is apportioned to obtain a fair and reasonable outcome.

• The standard method applies by default and HMRC will only approve a special method if it more accurately reflects the use of residual inputs.
• Review your partial exemption method regularly if you generate both taxable and exempt supplies.

We’re here to help

If you are an SME with a specific VAT question, or if you would like to discuss any of the topics in this article in more detail, please contact Paula or one of the tax team on 0330 058 6559 or email hello@scruttonbland.co.uk.