Autumn Budget 2025: Expert insights on what it could mean for you. Learn more
Our analysis of the major indirect topics of the Autumn Budget can be found here. Apart from the case of Ferrero, and its chocolate filled biscuits, the news about VAT does not have much of a Christmas theme. However, we have a wide range of issues covered by the Courts and Tribunals. These include: hospital car parking, cosmetic medical services, import VAT recovery, residential service charges and care provision in Wales.
[2025] UKSC 37 Northumbria Healthcare NHS Foundation Trust
Hospital car parking charges are standard rated.
The Supreme Court has delivered the final word on this long running dispute over VAT treatment of hospital car parking provided by NHS Trusts, deciding that the charges are standard rated.
The Court addressed two main issues. Firstly, it found that the Trust was not operating under a ‘special legal regime’, a requirement to be VAT free, because the NHS guidance that parking should be provided does not have the legal force required by the VAT system. Only obligations set out in primary or secondary legislation, or binding government notices, qualify for a “special legal regime”.
Secondly, the Court considered whether VAT exemption would distort competition. It concluded that exempting NHS Trusts from VAT on parking would give them a competitive advantage over private operators, either by enabling lower prices or by allowing profits to be retained or reinvested, thus distorting the market.
Comment: The decision reinforces that guidance is not law and that a ‘special legal regime’ for a public body must be grounded in specific legislation. It has also identified a broad range of ways that a distortion of competition can be created and confirmed that potential competition must be identified for the activity in question and assessed at a national level. The ruling has significant implications for NHS Trusts with approximately 50 similar appeals, involving around £70 million, affected.
[2025] UKUT 341 (TCC) Illuminate Clinics Limited
Dispute over medical exemption sent back to the FTT to reconsider the evidence while applying a broader test.
Illuminate, led by a qualified medical doctor, offers a range of aesthetic and wellness treatments. The clinic applied VAT exemption for several treatments (e.g., Botox, dermal fillers) on the basis that they constituted medical care. HMRC challenged the VAT exemption, arguing these were standard-rated cosmetic services.
In 2023, the FTT found that the treatments did not qualify as ‘medical care’ for VAT exemption. The tribunal emphasised that ‘medical care’ requires a diagnosis, treatment, or cure of disease or health disorder, not just cosmetic improvement. It also found the clinic’s records lacked sufficient evidence of diagnosis or therapeutic intent, and that most clients sought services for aesthetic reasons. The FTT doubted that the doctor was sufficiently qualified to diagnose mental health conditions that might be alleviated by her treatments and in any case held that psychological benefits (e.g., improved self-esteem) were not enough to qualify as medical care for VAT purposes.
The Upper Tribunal has now allowed the clinic’s appeal in part, finding the FTT’s approach to ‘diagnosis’ too narrow.
The UT clarified that while a diagnosis is usually expected, it is not always essential for VAT exemption—some treatments may be therapeutic without a formal diagnosis, or at least without the need for it to be fully documented. The UT has also introduced a multifactorial assessment for determining whether the principal purpose of treatment is therapeutic or cosmetic, considering factors such as: diagnosis, nature of the disorder, symptoms, procedure, context, and both client and practitioner perspectives. The case was remitted to the FTT for reconsideration using this broader test.
Comment: As we have previously discussed in our ITUs, HMRC has been actively challenging the application of the medical exemption by private clinics offering procedures that HMRC regards as ‘cosmetic’ and in some cases issuing large assessments for undeclared output tax. Against a background where most appeals of this nature have gone against the taxpayer, this decision offers a rare glimmer of hope for private cosmetic clinics as, although the UT hasn’t fully decided the case in favour of the clinic, it has cast doubt over one of the FTT’s main reasons for dismissing the clinic’s appeal, which relate to a perceived lack of diagnosis of an underlying health problem that requires treatment.
However, it should be noted that this finding is only of assistance when treatments are carried out to address physical health conditions - the UT has agreed with the FTT that the doctor running this clinic (who was qualified to diagnose and treat physical problems but is not a mental health specialist) was not in a position to prescribe treatments on the basis of a psychological condition, which is what many private clinics are relying on to support exemption.
TC09654 Ferrero UK Limited
Chocolate filled biscuits are definitely zero rated (but on the other hand may be standard rated).
Ferrero UK manufactures Nutella Biscuits, which are biscuit cups filled with Nutella, sealed with a chocolate-like ring, and topped with a biscuit disc. HMRC ruled that these biscuits were “partly covered with chocolate or a similar product,” making them subject to 20% VAT. This was based on the visibility of the chocolate-like sealant as a narrow ring around the edge of the top biscuit layer.
Ferrero appealed, first arguing that the visible chocolate-like substance was too minimal to constitute a “partial covering” and also contended that it did not form part of the outer surface, likening it to the filling of a lattice-topped pie. Ferrero maintained that the biscuits should be zero-rated as general food, not standard-rated as partly chocolate-covered biscuits.
The tribunal was tasked with interpreting “partly covered.” It concluded that for a product to be “partly covered,” the chocolate-like substance must form part of the outer surface to more than a trivial extent. In Nutella Biscuits, the chocolate ring was found to be below the top biscuit and not part of the outer surface, supporting Ferrero’s argument. Thus, the biscuits were ruled to be zero-rated.
Comment: The decision contrasts with the 2023 United Biscuits case concerning ‘Blissfuls’ biscuits, where a similarly exposed chocolate filling was deemed a partial covering and standard-rated. The FTT in Ferrero did not explicitly disagree with United Biscuits but nevertheless reached a different conclusion on that point. HMRC has decided not to appeal, leaving two contradictory FTT rulings on what constitutes a “partial covering.”
Importer must own goods to recover import VAT.
This dispute centres on TSI's entitlement to recover import VAT as its input VAT. The TSI group (based in the USA, Germany and UK) manufacturers scientific equipment mainly used for air and environmental measurement. The main activity of TSI in the UK is the service, repair and calibration of TSI group products which have been sold to customers around the world. At no point does TSI become the owner of the goods which remain in the ownership of the customers.
TSI acted as importer when its customers sent their equipment to be calibrated, and sought to recover the import VAT as it claimed to “use the goods for the purposes of its business”.
The FTT considered itself bound by judgements of the CJEU, including Wiendel (Case C-621/19 ) which confirms “the right to deduct VAT exists only to the extent that the imported goods are used for the taxable person’s taxable transactions” and that “this condition is met only when the cost of the input services is reflected in the price of the specific output transactions”. Furthermore, the FTT considered the relevant UK law to be in conformity with the VAT Directive, so the appeal was dismissed.
Comment: The decision includes the possible solutions ie the owner acting as importer (if the owner is based overseas it would need to make an overseas VAT repayment claim) or for TSI to register for inward processing relief. Given the VAT bill was more than £8million, TSI may be minded to take the appeal further, but adequate grounds look hard to find.
Residential service charges are standard rated unless supplied by the landlord but concession ESC 3.18 may still apply.
This case concerns the VAT treatment of service charges collected by maintenance trustee companies (MTCs) for 25 residential blocks of flats. The core issue was whether the MTCs’ supplies of maintenance services are exempt as supplies of residential property or taxable as HMRC contends. The appeal also raised whether certain staff costs qualify as VAT-exempt “disbursements.”
Each residential flat operates under a tripartite lease involving the Lessor, Lessee, and an MTC. Lessees pay “Maintenance Contributions” to the MTC, which retains its fee and places the balance into a Maintenance Fund held on trust. Funds cover structural repairs, common parts upkeep, insurance, and staff wages. The MTCs and managing agent (RMG) are part of the appellant’s VAT group. Historically, these charges were treated as exempt, but following HMRC guidance changes in 2018, VAT was applied from late 2020.
The taxpayer argued the maintenance services and contributions are inseparable from the lease and should be treated as part of an exempt supply of land. Two suppliers (Lessor and MTC) can make a single composite supply, or the MTC’s services are ancillary to the Lessor’s exempt supply. Alternatively, staff employment costs are disbursements outside VAT scope.
HMRC asserted the supplies by MTCs are made to the Lessors, not Lessees, as common parts remain under Lessor control. Even if supplied to Lessees, separate suppliers cannot fuse supplies into one exempt supply. Employment costs are incurred by MTCs in fulfilling their own obligations and are not disbursements.
The Tribunal found the direction of the supply by the MTC’s was to the landlords not the tenants, because maintenance of common parts benefits the lessors, who retain ownership and obligations. Supplies by different entities cannot be combined into a single exempt supply and since VAT exemptions must be construed strictly, standard rating must prevail. Finally, the staff costs are not disbursements; they form part of the MTCs’ taxable supplies.
The appeal was dismissed on all substantive points. However, this appeal has now been stood over behind a similar dispute in Chelsea Cloisters, which is waiting to be heard in the High Court. The FTT in Chelsea Cloisters found that it did not have jurisdiction to force HMRC to apply the concessionary treatment in ESC 3.18, but gave an opinion that the management company in that case was making supplies directly to the tenants and had a legitimate expectation that its supplies were exempt under that concession – Chelsea Cloisters is now pursuing this in the High Court by way of judicial review.
Comment: HMRC’s 2018 changes were controversial and have reportedly caused a great deal of confusion for landlords and property managers ever since. Now we have two seemingly contradictory views at FTT level of the VAT liability of service charges charged to lessors of residential flats, with the FTT in Places For People finding that services provided in relation to the non-demised areas of the property were made to the landlord, and the FTT in Chelsea Cloisters (TC09428) believing that the manager’s services were supplied for the benefit of the residents. While there are likely to be differences between individual leases, we hope that the High Court’s eventual decision will provide more clarity for the sector.
Nursing staff agency’s services are standard rated unless regulated by the Care Quality Commission.
1st is an employment business supplying nurses and care assistants to NHS and private hospitals/care homes. The issue is whether the reimbursement of employment costs (pay, taxes, etc.) for supplied staff during 2014 to 2026 should be exempt from VAT as services “closely connected to medical care”.
The Appellant accounted for VAT on its commission but treated employment cost reimbursements as exempt but HMRC assessed for output tax on the whole of the consideration.
1st applied for Judicial Review, claiming it could use the Nursing Agency Concession on a retrospective basis, however it failed in both the High Court and in the Court of Appeal. This result meant that 1st could not argue it should account for VAT only on its commission element, and it fell back on the assertion that the whole of its supply was exempt.
However, the FTT found that during the relevant period 1st was not registered with the CQC (it having lapsed in 2010) so there was no possibility of the supplies being exempt as “The Provision of care or medical or surgical treatment and, in connection with it, the supply of any goods, in any hospital or state-regulated institution”. 1st was not assisted by its European law arguments because the lack of regulation by the CQC was fatal to this argument.
Comment: Supply of medical staffing remains a contentious area for agencies. Regulation (ie registration with the CQC or devolved equivalent) is a necessary step to have any chance of claiming exemption.
We have the recent case of the Isle of Wight NHS Trust which found provision of locum doctors is exempt and the follow up question is whether this exemption in Item 5 (provision of a deputy) can apply to registered nurses and other medical professionals as well as doctors. We have heard that HMRC is not seeking to appeal that decision.
TC09680 Cascade Care Ltd
Care services in Wales are exempt despite gap in legislation.
Cascade Care provides specialist residential and supported living services in Wales for adults with complex needs and claimed a gap between the UK Parliamentary Acts and Welsh legislation after 1 January 2018 meant exemption no longer applied. Where such care was funded by a local authority standard rating would lead to greater input tax recovery by the care provider.
The Tribunal undertook an analysis of the staged process of Welsh Devolution with the latest step being the Regulation of Care in Wales coming under the control of Care Inspectorate Wales from 1 January 2018 under Regulation and Inspection of Social Care (Wales) Act 2016 (which is not a UK parliamentary Act). However, the Tribunal dismissed that appeal on the grounds that the omission of Welsh Acts was inadvertent and the application of the Inco Europe principle (where a Court can correct an obvious drafting error) to make a correction.
Comment: Welsh-regulated care services continue to be VAT exempt. This is the second recent instance (alongside JD Weatherspoon) of the Tribunal ruling that the law contained an inadvertent drafting error, and it had the power to make an appropriate correction.
VAT is due on minimum legal fee paid by losing party in Court dispute.
The CJEU has issued a judgment in this reference from Bulgaria, which concerns the VAT position of legal aid. The court found that payments received by a lawyer under the legal aid scheme are considered taxable supplies of legal services.
A VAT-registered lawyer represented TPT, a private client, in legal proceedings. The case was eligible for Bulgaria’s legal aid scheme, so TPT received the services free of charge. The court ordered the losing party to pay €400 to the lawyer to cover the minimum fee.
A dispute arose over whether the losing party was also required to pay VAT on the fee. The CJEU was asked to determine if VAT is payable on legal services provided free of charge to the client but where the lawyer was reimbursed by a court-ordered payment from the unsuccessful party in the dispute.
The CJEU upheld the AG’s opinion, agreeing that the lawyer's services were supplied for consideration and were therefore taxable. The uncertainty of payment, the below cost value of the payment, the statutory nature of the fee, and the third-party payer did not prevent the service from being subject to VAT. The CJEU added that the contract between the client and the lawyer, along with the law requiring the unsuccessful party to pay the lawyer's fixed fee, established a direct link between the legal services and the fee.
Comment: The decision is not binding in the UK and practical differences between the UK and Bulgarian legal aid schemes may limit its relevance here. There is very little specific guidance available on the VAT position of legal aid in the UK, although Business Brief 4A/00 suggests that the HMRC generally regards lawyers’ income for legal aid work to be taxable.
Invoice factoring services are standard rated.
The CJEU has ruled that Kosmiro/A Oy, a Finnish company provides standard rated factoring services. The case revolved around the VAT treatment of commission and other charges made for invoice factoring. The CJEU ruled that the factor’s supplies, including commission and other charges, are not for exempt supplies of credit but constitute a single supply of standard-rated debt recovery services.
Kosmiro offers two types of factoring: factoring by pledge and sale of receivables. In factoring by pledge, Kosmiro grants credit to its clients up to a certain amount, with the risk of default borne by the client. In the sale of receivables, Kosmiro buys selected receivables outright and assumes the risk of default. Kosmiro charges various fees, including a financing commission and a file preparation fee.
The Finnish tax authority viewed Kosmiro’s fees as subject to VAT for debt management and recovery services but considered the financing commission as an exempt supply of financial services. Kosmiro appealed, arguing that all fees, except a limit fee, were subject to VAT.
The CJEU upheld the Advocate General’s opinion, deciding that all factoring services are debt collection and subject to VAT. The financing commission and file preparation fees for a sale of receivables are consideration for Kosmiro’s supply of factoring services, not an adjustment of the purchase price of the debts. The court found that neither the sale of receivables nor factoring by pledge are supplies of credit, as the funds paid are not loans but consideration for the sale of debts or debt recovery services.
Comment: The judgment is not binding in the UK but may be of interest to UK factors and their clients. At a high level, it appears to align with HMRC’s policy that factoring is a standard supply of debt collection, but those involved in factoring may wish to compare the small print of the judgment and AGs opinion to HMRC's detailed guidance, which suggests some associated services may have a different VAT treatment.
VAT is recoverable on purchase of tooling that remains in Bulgaria.
In this dispute, tooling used to make automative parts was sold to Brose Slovakia by a related company with a Bulgarian VAT registration. The tooling remained at the premises of a third-party manufacturer in Bulgaria.
VAT was charged on the sale of the tooling, but the non-established VAT claim (formerly 8th Directive claim) was refused by Bulgaria. The Court, agreeing with the AG whose opinion was published in May this year, has ruled that the tax authority’s position is incorrect. VAT had to be charged because the equipment remained in Bulgaria and was recoverable because Brose used the tooling in its taxable business.
Identifying mortgage providers is exempt.
Versaofast undertook a number of activities including “identifying and soliciting potential clients for mortgage loans", “assisting these clients in gathering the necessary documentation for their loan applications”, “conducting an initial analysis of the documentation submitted by clients for the processing of their application” and forwarding this documentation onto the lending institution, before presenting clients with loan offers from the credit institutions and then “informing them of the final decision of the institution whose offer they have chosen”. Versaofast contended that, although its supplies to other customers were VAT exempt, the same services supplied to one customer (“CGD”) should be taxable. Their motivation is not clear since it appears to result in more tax due to the state. The tax authority disagreed, stating that the supplies to CGD should also be VAT exempt, issuing a related assessment for over-recovered input VAT.
The CJEU held the VAT exemption provided for within Article 135 (1)(b) of the VAT Directive – specifically with reference to “credit negotiation” - should apply in this case, and this applies even if the intermediary does not have the power to act on behalf of the credit provider, cannot influence the relevant conditions and if the potential credit recipient is free to decide whether or not to accept the credit, and from which provider.
Comment: The logic of the case is perplexing. Why would the customer, CGD and Versaofast consider the services were standard rated as this would seem to increase the overall tax liability? Conversely, why would the Portuguese tax authority argue for exemption, as this would reduce its overall tax revenues?
C-565/24 P-GmbH & Co. KG – Germany AG Opinion.
Loss leader excursions may be excluded from the Tour Operators Margin Scheme (TOMS), so input tax can be recovered.
This case dates back to 1999 to 2001, and at that time P provided excursions to tourist destinations where it aimed to sell goods to its customers. The price charged for the excursion (transport and refreshments) would not cover the costs but the profit from sale of goods made the business profitable.
The tax authority claimed the business was obliged to use the Tour Operators' Margin Scheme so that it could not reclaim the VAT charged on the transport and refreshment costs. However, when P offered free transport in the expectation of making sufficient profit from sales of goods, it was accepted that the VAT on the transport costs was recoverable.
The AG found the arguments for and against using the TOMS were finely balanced but eventually came down on the side of excluding the particular and special circumstances of the dispute from the TOMS (there was not an intention to make a profit from the excursion element) and applying normal VAT rules to allow recovery of input tax. This was on the grounds of fiscal neutrality (to prevent more tax being collected than the appropriate fraction of the consumer's expenditure) and the anomaly that would result between providing the excursions free of charge and for a price that did not cover the costs.
Comment: given the finely balanced arguments and the Court's previous rulings that the TOMS is mandatory we await the final word from the Court with interest.
HMRC news
On 10 November 2025 HMRC published RCB 2025/06 - VAT deduction on insurance intermediary services supplied outside the UK. The RCB confirms that HMRC accepts the FTT decision in Hastings Insurance that until 31 December 2023 Article 3A of the Specified Services Order (SI 1999/3121) was not compatible with Article 169(c) of the principal VAT directive and that Hastings was entitled to rely on the direct effect of EU law to recover their related input tax.
Comment: This means that insurance intermediaries supplying services outside the UK can rely on direct effect of EU law to recover relevant input tax incurred prior to 1 January 2024, whether the insured party is in the UK or not. In practice, for insurance licencing reasons, this will probably only apply to services provided to insurers which are licenced to provide insurance to UK customers (usually based in Gibralter).
Ireland
On 19 November 2025 the Irish Revenue Commissioners published guidance confirming the implementation of territorial VAT grouping. Ie only head offices or branches established in Ireland are eligible to be in an Irish VAT group.
For new applications the new guidance will apply immediately, for existing VAT groups the new guidance will apply after 31 December 2026.
This policy change is in stark contrast to HMRC’s policy announcement in RCB 7 (2025) that HMRC now considers that an overseas establishment of a business VAT grouped in the UK should be treated as part of that VAT group, even when located in an EU member state that does not operate whole entity VAT grouping.
