Summary
This month we have a bumper crop of cases to consider: VAT grouping v time of supply rules in Prudential; partial exemption methods in Hippodrome Casino; exemption for locum doctors in Isle of Wight NHS Trust; transfer pricing adjustments in Arcomet Cranes; two disputes about gaming purchases (Xyrality and whether points mean vouchers or discounts). In addition, the Advocate General has challenged the Court to impute a second-hand margin scheme for services (not just goods) due to advancements in electronic gaming since the EU Law was written.
News from the UK Courts and Tribunals
First Tier Tribunal
[2025] UKSC 34 The Prudential Assurance Company Ltd
The Court has ruled that time of supply rules take precedence over VAT grouping, so performance fees payable sometime after the supplier left the customer’s VAT group are subject to VAT.
Background:
Silverfleet Capital Ltd (“SCL”) supplied investment management services to The Prudential Assurance Company Ltd (“Prudential”). The services were carried out whilst SCL and Prudential were both members of the same VAT group from 2002 to 2007, so even though they would have been standard rated the VAT group meant there was no VAT chargeable.
However, performance bonuses were invoiced and paid for about 10 years after SCL left the VAT group. Both the Court of Appeal and the Upper Tribunal held that such supplies should be treated as made after SCL left the VAT group because the time of supply rules in regulation 90 applied in preference to the grouping rules. Prudential, being unable to recover the VAT if it was chargeable, appealed to the Supreme Court.
The Court commented that the dispute arose before the UK left the EU, so CJEU case law and legal analysis is relevant. It then concluded that VAT is only payable on the success fees if the effect of the time of supply rules is to change the timing of the chargeable event to the time of payment and provided those rules conform with the Principal VAT Directive. The Judgement goes on to confirm that Regulation 90 is in conformity with Article 64 of the PVD, so Prudential’s appeal must fail.
Comment: We now have the final word on this appeal, and it is now clear that payments relating to services supplied while a supplier was in the same VAT group as its customer, but made after the supplier left the VAT group, are subject to the normal VAT rules and are not excluded by the VAT grouping rules.
High Court
[2025] EWHC 2312 (Admin) Hotelbeds - Judicial Review
Hotel Booking Company is allowed to recover input tax despite lacking tax invoices from its suppliers.
Hotelbeds is a hotel booking company that acts as principal. It buys hotel beds and sells to businesses as a wholesale supply. However, it seems that, because it uses a virtual credit card to pay the hotels (either at check-in or check-out) most hotels are not motivated to provide Hotelbeds with tax invoices, so do not do so despite being chased.
HMRC refused to refund input tax incurred and Hotelbeds has made a successful judicial review application, with the Court saying HMRC should have allowed the VAT claimed by ECNs and this is based on HMRC’s published guidance.
Comment: The case highlights the difficulty of obtaining tax invoices after the event, particularly where payment has been made automatically and there is nothing in it for the supplier. Readers will be aware that the supplier has a legal obligation to provide tax invoices to taxable persons, but it is not always easy to assert that right as a customer.
First-tier Tax Tribunal
TC09640 Isle of White NHS Trust
First Tier Tribunal reverses long-standing position that VAT is due on locum medical staff supplied via agencies.
Isle of Wight NHS Trust (the lead case for 20 similar appeals) appealed HMRC’s decision that VAT was due on locum medical staff supplied via agencies because as customer it cannot recover the VAT charged.
The substantive issue is whether supplies of Locums qualify for VAT exemption “the supply of a deputy for a registered medical practitioner”. The FTT had looked in detail at these arguments in 2013 when the FTT found for HMRC in Rapid Sequence (TC02826). At the time it was surprising the decision was not appealed further.
The FTT examined the plain meaning of “the supply of a deputy for a registered medical practitioner”, finding this would include locums and found a clear difference between the language of the item, being the supply of a person, rather than a supply of deputising services. Having considered the “intention of parliament” when the measure was introduced in 1979 the FTT found the UK law clearly point to exemption.
HMRC fell back on the argument accepted in Rapid Sequence that the UK rule is subject to “conforming interpretation” (ie the UK Court or Tribunal can alter the words of a statute to conform with the purpose of the EU directive). However, the FTT found that because the rule refers to supplies of a person (ie a staff) rather than medical services as outlined in the Directive, the measure is clearly ultra vires and there is no possibility of massaging the words to comply. In these circumstances the taxpayer is allowed to rely on the UK law to its advantage, but HMRC cannot displace it by EU provisions.
Comment: the decision confirms that locum supplies to NHS Trusts can be VAT-exempt and reinforces that UK VAT law must be interpreted based on its own wording, not solely EU law. It sets a precedent for similar cases involving medical staffing and VAT. However, given the sums involved it seems very likely HMRC will appeal. Grant Thornton is well prepared to assist Trusts and businesses affected by the decision.
Court of Justice of the European Union – Judgement
Case C-101/24 - Xyrality GmbH - Germany
Background:
X, an app developer, had originally accounted for German VAT on its supplies of Apps to an Irish based app store (because it thought it was supplying final consumers (meaning the place of supply is where the supplier belongs) however it later asked for a refund, because it thought its supplies were to the app store business (meaning the place of supply is where the customer belongs). The dispute concerns supplies made before 1 January 2015 (before Art 9a of the Implementing regs applied to Art 28 of the PVD).
The Court has agreed with the AG that the final consumer would think they were getting the app, and additional in app purchases, from the App store (established in Ireland), rather than the developer (established in Germany and identified by the App store), so Article 28 (supply by and to an undisclosed agent) deems the supply to be to and by the App store. The dispute concerns supplies made before 1 January 2015, when Article 9a of the Implementing Regulations clarified the undisclosed agency rules rather than radically changing them, so the Court decision is consistent with the clarified meaning.
Finally, the Court agreed that Article 203 of the PVD (VAT is due from anyone who puts VAT on an invoice) only applies to counter non-taxation or the possibility of a customer treating the VAT shown as recoverable. This means that an invoice showing VAT (which is incorrectly charged) for a supply to a final consumer does not create a liability to the tax authority. Presumably the German supplier can now reclaim its overpaid output tax, but the Irish App store may have a problem.
Case C-726/23 SC Arcomet Towercranes SRL - Romania
This judgement considers whether transfer pricing adjustments, particularly those made under the transactional net margin method, are subject to VAT.
Background:
Arcomet is a global group renting and selling cranes, with a Belgian parent company providing strategic and operational support to its subsidiaries, including one in Romania. The parent company's services to its subsidiaries include helping them to find and negotiate contractual terms with suppliers and obtain finance.
A 2010 transfer pricing study determined that subsidiaries should maintain an operating profit between -0.71% and 2.74%. If profits exceeded this range, the parent company issued invoices to adjust them. In 2011–2013, the Romanian subsidiary exceeded the upper limit, prompting the parent to invoice for the excess.
The dispute centred on whether these adjustments constituted consideration for a supply of services for VAT purposes and what evidence the subsidiary must provide to support recovery of VAT incurred as a reverse charge on the parent company's invoice.
The CJEU confirmed that Arcomet’s transfer pricing adjustment constitutes consideration for a supply of services. The legal relationship between the parent and subsidiary involved reciprocal obligations, with the parent providing strategic and operational services and bearing economic risks, while the subsidiary agreed to profit-sharing (via the adjustment) based on performance.
The court rejected Arcomet’s argument that the adjustment was merely a compliance mechanism with OECD principles, affirming that the payments reflected the value of services rendered. It also distinguished between passive and active holding companies, noting that Arcomet’s parent actively managed, and provided services to the subsidiary.
Regarding VAT recovery, the CJEU agreed that the burden to provide evidence to support input tax recovery lies with the taxpayer. In this case, the invoices did not contain any information on the quantity or the nature of the services provided so did not comply with the formal rules on what information must be included on a VAT invoice. The court ruled that the tax authority may request further documentation if necessary and proportionate to prove the existence of the services and their use for the purpose of the subsidiary's taxable transactions.
Comment: The court seems to have found that VAT applies to a transfer pricing adjustment where:
- It is triggered by the subsidiary’s operating profit exceeding the range identified in a transfer pricing study
- The parent company is actively involved in the management of the subsidiary or provides other taxable services to the subsidiary (i.e. it is not just a passive holding company).
The ruling concerns adjustments made under the transactional net margin method and does not address other OECD methods. The AG’s broader view suggests that not all transfer pricing adjustments may be taxable, depending on the method and context.
Though not binding in the UK, the lack of case law on the VAT implications of transfer pricing adjustments suggests that UK courts may find Arcomet persuasive when considering similar disputes. It also highlights the importance of documenting underlying services in transfer pricing adjustments and producing compliant VAT invoices.
Court of Justice of the European Union - Advocate General Opinions
C-409/24, C-410/24, C-411/2 J-GmbH, Blapp and D GmbH – Germany – liability of bed and breakfast
The AG recommends a single supply can, in limited circumstances, be taxed at more than one rate.
The dispute looked like a single v multiple supply question on short term accommodation with other services. In Germany accommodation is reduced rated, but restaurant services are standard rated. The taxpayers provided Bed and Breakfast and applied the reduced rate with a single price and no option to exclude breakfast from the price. The tax authority claimed additional tax was due on the breakfast element since, even if the package constituted a single supply in the eyes of the consumer, there was a concrete and specific element of the supply that should be taxed at the standard rate. The AG has followed the “concrete and specific” rule first used in the French Undertakers case (C-94/09) in his recommendation.
In the UK, HMRC treat the removable contents of a caravan as excluded from the zero-rate supply even though there is a single supply. This was supported by the CJEU in Talacre Beach (C-251/05). A few years ago, it was rumoured that HMRC would invoke the “concrete and specific” concept to exclude professional services from the single supply of zero-rated constructions services, but it was not progressed.
C-472/24 Žaidimų valiuta - Lithuania – liability of in game assets
The case concerns the VAT treatment of in-game assets, specifically in-game gold from the computer game RuneScape. The Advocate General has provided an opinion on whether these assets should be considered a currency or a voucher for VAT purposes and if they can be resold under the second-hand margin scheme.
The AG is of the opinion that in-game gold is neither a virtual currency nor a voucher but may be eligible for the second-hand margin scheme.
The AG distinguishes in-game gold from Bitcoin, which was found to be an exempt currency in a 2015 judgment. Bitcoin has bi-directional flow and is used as a means of payment, whereas in-game gold is 'play money' used only within the game.
The AG also suggests that in-game gold is probably not a voucher for VAT purposes, because the gold is a benefit of the game in its own right, not just a means to buy other services, but this conclusion is tentative due to a lack of background information in the referral. However, the court does have the power to request written submissions to clarify this before issuing its final judgment, so the point may be revisited at that stage.
The AG raises the intriguing possibility that in-game assets, including in-game gold, should not be excluded from the second-hand margin scheme despite those rules applying only to second had goods.
The purpose of this scheme is to prevent double taxation and competitive disadvantages, and it could be extended to include services that are sold and resold in the same way as second hand goods. The AG also highlights that the margin scheme was initially confined to second-hand goods due to the assumption that services are always consumed when supplied and cannot be traded on.
The AG believes that a literal interpretation of the definition of second-hand goods would contradict the purpose of the legislation. The concept of second-hand goods should cover the sale of objects technically regarded as services but traded in the same way as goods. The AG cites other examples such as the sale of admission tickets, physical documents attesting the right to carriage, and the sale of electronic art using NFTs.
Comment: The AG’s opinion is likely to be welcomed by video game producers, which had been concerned that applying a virtual currency status to in game gold, or similar tokens, would create partial exemption and non-VAT related regulatory issues for them.
However, the most interesting finding in this case is the AG’s belief that there is no reason to exclude in-game assets (and possibly some other services with a resale market) from the second-hand margin scheme. The AG believes that the underlying purpose of the second-hand margin scheme is enough to ignore the categorisation of a supply as one of goods or services. We shall see what the Court concludes in due course.
Case C-436/24 Lyco Operations - Sweden - definition of a voucher
Lyko Operations is a retailer of hair care and beauty products, selling to consumers via shops and online. It operates a loyalty scheme under which customers receive points for each purchase which they can then use to buy from a range of low value products in Lyko’s ‘points catalogue’ which are priced by their points value. Lyko’s catalogue includes standard rated goods as well as some products that are subject to reduced rates of VAT in Sweden. Consideration for those products is ‘paid’ entirely in points – it is not possible to part pay for the items in cash, and the points (which typically equate to 2-10% of the value of the original purchase) cannot be redeemed for money and are not transferable.
The CJEU has been asked to rule on whether these points constitute a voucher for VAT purposes (which would be multipurpose vouchers as the VAT rate of the goods they will be redeemed against has not been determined at the time the points are issued).
The Swedish tax authority’s position is that no specific monetary value is assigned to the points, meaning they are not a voucher at all, so all VAT is due at the time the customer buys their initial item.
Lyko argues that when customers make a purchase that earns loyalty points, they are paying both for the product and for the points, so the points do have a value assigned to them, which they must have to be regarded as a voucher. That voucher is a multi-purpose voucher so VAT wouldn’t be payable on the value of the loyalty points consideration unless and until they are redeemed.
The AG is of the opinion that the points issued under this loyalty scheme amount to a discount on a future purchase rather than vouchers for VAT purpose. This is because the points do not create a standalone obligation for Lyko to supply goods. Instead, they function as a discount mechanism tied to a future purchase. A voucher must be usable independently as consideration for goods or services. Lyko’s points can only be used alongside a new purchase, which disqualifies them as vouchers.
Comment: If the Judgement follows the AG's analysis, with VAT being due on the full price paid on the original purchases, there does not seem to be any output tax on the items purchased with points. Many of you will recall the CJEU decision in Kuwait Petroleum, which at first glance gives the opposite result. The AG covers this briefly but comprehensively, saying in Kuwait the customer could accept or decline vouchers which could be collected to exchange for “gifts”, whereas in this dispute, the customer signed up for the points scheme and would be awarded them each time a purchase was made.
Your editors are not sure this reasoning is sound, because the customer can choose whether to provide their loyalty card at the till, and this would be similar to asking for or accepting vouchers at the petrol station. As is always the case with AG opinions, we await the final word from the Court.
