This month's theme is boundaries: how far exemptions stretch for education, healthcare and dental devices, and how tightly VAT groups need to be tied together. Alongside the case law, HMRC pushes ahead on the Capital Goods Scheme, deposit returns, and low value imports.
Summary
- The Court of Appeal has widened VAT exemption for education providers on fiscal neutrality grounds, while the Upper Tribunal has drawn a firmer line elsewhere — confirming Invisalign aligners are standard-rated and that a hospital's bedroom wing doesn't qualify for care home relief.
- At First-tier level, Winchester City Council keeps a second refund claim alive, David Lloyd's gym memberships miss out on the pandemic-era reduced rate, and Compound Photonics shows how retaining IP after a business sale can suspend VAT recovery.
- The EU General Court's Sampension ruling questions Denmark's 100% ownership rule for VAT grouping, a decision with read-across for how grouping eligibility might be argued elsewhere.
- On the policy side, HMRC is confirming the Capital Goods Scheme changes from 29 July 2026, clarifying VAT treatment for deposit return schemes and the compassionate medicines scheme, and moving ahead with plans to scrap the £135 low value import threshold and introduce a legal duty to correct errors.
Court of Appeal
St Patrick's International College and others [2026] EWCA Civ 852
Court of Appeal backs education providers in VAT exemption dispute
The Court of Appeal has overturned earlier tribunal decisions and ruled that certain privately owned education providers should benefit from VAT exemption on their educational supplies.
The case concerned three for-profit providers of further and higher education that argued they were being treated less favourably than universities, colleges and other recognised educational bodies. While both the First-tier Tribunal and Upper Tribunal had largely rejected their claims, the Court of Appeal reached a different conclusion based on the principle of fiscal neutrality.
The Court held that the key question is whether the educational services are viewed as equivalent by the typical student, rather than whether the providers have the same legal or regulatory status as traditional educational institutions. As the courses supplied by the taxpayers were materially the same as those offered by VAT-exempt providers from a student's perspective, denying exemption created an unacceptable distortion in VAT treatment.
This is an important reminder that the VAT liability of supplies can depend not only on statutory wording but also on broader principles developed through European case law. However, the periods under appeal were before Brexit, when taxpayers could rely directly on EU VAT principles. The extent to which fiscal neutrality can be used to challenge VAT treatment for post-Brexit periods remains uncertain and has yet to be fully tested by the courts.
What does this mean for businesses?
Education providers that have historically been denied exemption may wish to review their position, particularly where their courses compete directly with those offered by exempt institutions. However, any consideration of historic claims or future treatment should be undertaken carefully, as the relevance of fiscal neutrality in the current UK VAT regime remains unclear.
Upper Tribunal
Align Technology Switzerland GmbH [2026] UKUT 256 (TCC)
Invisalign teeth aligners are not VAT exempt
In a useful lesson for anyone selling health-related products the Upper Tribunal has confirmed that Invisalign clear teeth aligners are standard-rated for VAT, overturning an earlier First-tier Tribunal (FTT) ruling that treated them as exempt "dental prostheses".
Align argued its aligners should qualify for the VAT exemption that applies to prostheses like crowns, bridges and dentures. The First-tier Tribunal agreed but HMRC did not and took the case further.
The Upper Tribunal sided with HMRC. Its reasoning: a prosthesis replaces a missing or damaged body part. Aligners don't replace teeth, they move existing ones into a better position. That makes them a treatment device, not a prosthetic replacement, however beneficial the end result.
Why it matters: the exemption for dental prostheses is a rare example of VAT relief on goods rather than services, and this case is a helpful reminder of just how narrowly it's drawn. If you supply orthodontic or dental products, it's worth checking your VAT treatment against this distinction.
NHS Ayrshire and Arran Health Board v Revenue and Customs [2026] UKUT 258 (TCC)
The Upper Tribunal reminds us that VAT rules can turn on how a building is actually used, not just what it's called.
NHS Ayrshire and Arran built a new unit at Ayrshire Central Hospital to care for young people detained under mental health law. The building has three parts: education and clinical care, administration, and patient bedrooms.
Construction of a genuine care home is normally free of VAT. So, the Health Board asked HMRC to confirm the same treatment applied here, at least for the bedroom wing, arguing it was a separate, self-contained residential area.
HMRC disagreed. It said the whole building, bedrooms included, was part of a hospital. And hospitals don't qualify for the same VAT relief as care homes.
Both the First-tier Tribunal and now the Upper Tribunal sided with HMRC. Deciding that just because somewhere is where you sleep doesn't automatically make it a "home" for VAT purposes.
Nurses treated patients in the bedroom wing too, and that treatment fed directly into each patient's wider care plan. It could not be neatly separated it from the rest of the hospital.
Meals and family visits happened elsewhere in the same building still a hospital, not some unrelated location. The patients were there to be treated, not simply cared for. That distinction matters.
These factors meant the building, as a whole, constituted a hospital and its construction is specifically excluded from zero rating.
Why it matters beyond this case: Few of us are building secure adolescent units. But the principle travels well: where a building mixes care and clinical treatment, it is necessary to look hard at how the parts function together, not just how they're labelled or laid out. A "residential" wing next to a treatment area doesn't get zero-rating on its own merits if the two are, in practice, working as one.
If you're involved in funding, designing or building healthcare or welfare facilities, it's worth checking the VAT position early, before costs are committed. Getting this wrong is an expensive mistake to unpick after the event.
First-tier Tribunal
TC 09928 Winchester City Council
A council gets a second bite at the cherry, at least it wins the right to be heard.
The First-tier Tribunal's decision in Winchester City Council is a useful reminder that a rejected VAT claim isn't always the end of the road.
Winchester CC believed it had overpaid VAT on fees it charged to administer Disabled Facilities Grants - grants that help disabled people adapt their homes. In May 2023, it submitted a repayment claim under section 80 of the VAT Act 1994, arguing the fees should be exempt from VAT. HMRC rejected the claim in August 2024, and the council didn't appeal.
Almost a year later, in May 2025, the council submitted a second claim covering the same periods. This time, it argued on two grounds - the fees were either exempt or fell outside the scope of VAT altogether, because the council wasn't acting as a business when it charged them.
HMRC pushed back hard. Arguing this was the same claim in a new guise, an attempt to sidestep the strict time limit for appealing the original rejection. HMRC called it an abuse of process and asked the tribunal to reject it.
The tribunal sided with the council, saying the 2025 claim wasn't just a repeat. It added a new legal argument, that the fees were outside the scope of VAT, which the 2023 claim hadn't made.
The bar for "new" is low. Following the Cambria Automobiles case, a later claim only needs to add something materially different, in fact or in law, to count.
Nothing had actually been decided by a court or tribunal on this point before. Without a prior ruling to circumvent, there was no abuse of process. A fresh claim can be made within the four-year time limit, provided it isn't merely repetitive.
Why this matters: If you've had a VAT repayment claim turned down, and was not appealed, this decision is a useful prompt to revisit it, particularly if you've since identified a different legal basis, or a fresh line of argument, for the same VAT. HMRC can't automatically block a second claim just because an earlier one covered the same ground and wasn't appealed.
Two points of caution, though. First, the threshold is low but it isn't zero — simply resubmitting the same claim with different wording is unlikely to succeed. Second, this decision is about process, not substance: the tribunal hasn't yet ruled on whether the grant administration fees are actually exempt or outside the scope of VAT. That fight is still to come.
If this could apply to a claim you've made or are considering, it's worth getting a technical review before deciding how to proceed.
TC 09931 Next Generation Clubs Limited (David Lloyd)
Next Generation Clubs Limited is the representative member of the VAT group behind the David Lloyd and Harbour Club brands.
The claim: David Lloyd argued its memberships were "admissions to similar cultural events and facilities" under the temporary reduced rate that applied from 15 July 2021 to 31 March 2022, the same relief that covered cinemas, zoos, museums and amusement parks during the pandemic.
Why it failed: The Tribunal accepted David Lloyd's offering is broad, but broad isn't the test. It looked for what makes an amusement park an amusement park: a central attraction, an experience out of the ordinary, something a visitor drops in for. David Lloyd's whole model runs the other way – a "home away from home" built for members to use every day, not an occasional treat. On that basis, it doesn't meet the same need in a customer's life as the attractions the relief was designed to support.
David Lloyd also tried a more technical argument: that "similar cultural events and facilities" splits into two separate ideas, meaning "facilities" wouldn't need any cultural element at all. The Tribunal wasn't persuaded – some cultural content is still required, even if only a light touch, and David Lloyd clubs didn't have it.
Why it matters: This is a useful marker for anyone who took a view on Group 16 during the pandemic, particularly in leisure and wellness, and is thinking of applying the Temporary Reduced Rate to its offering over the summer. Recreational activity alone isn't enough. The Covid relief was built around the visitor attraction – something people visit for a specific experience – not the membership model built around everyday use. If your facilities are designed to become part of a customer's routine rather than a break from it, this decision will provide more certainty to the VAT position.
TC 09934 Compound Photonics Group Limited
Sell the business, keep the IP: a costly VAT lesson from the tribunal
Selling a business but hanging on to valuable intellectual property (IP) is a common move. This FTT decision is a reminder that doing so can switch off your right to reclaim VAT — sometimes for years.
What happened: A UK VAT group had built micro-display technology. In May 2017, it sold the operating business and manufacturing side but kept certain IP. Development work then carried on in a US subsidiary, outside the UK VAT group.
HMRC assessed around £545,000 of input tax, arguing that once the business was sold, the UK group was no longer carrying on any economic activity, so it had no right to reclaim VAT on its ongoing costs.
Five years later, in 2022, the group sold that IP to a US buyer for USD 101 million.
The tribunal decided the 2017 sale switched things off. From that point, the UK companies became passive holding entities — owning shares and IP but not trading. The taxpayer said it always intended to make taxable supplies again, but couldn't back this up with anything beyond vague, general assertions.
The 2022 IP sale switched things back on. Selling the IP for consideration was itself an economic activity, even though it happened separately and years later.
The VAT claim isn't settled yet. To reclaim VAT on costs, you need to show a direct link between those costs and a taxable sale. The evidence linking the disputed input tax to the IP sale was insufficient for the tribunal to decide either way. HMRC and the taxpayer must now try to agree, and if they can't, come back with better evidence, with the taxpayer carrying the burden of proof.
Why this matters: if you're restructuring a group, selling a business, or holding IP you're not actively exploiting, this case is a warning. Retain IP with no active plan to use or sell it, and you can lose input tax recovery from the moment trading stops — on future costs and, potentially, on past claims too. A stated intention to trade again isn't enough; you need evidence — business plans, marketing, real decisions. Sell the asset later, and you may revive your right to recover VAT on directly linked costs, but only with clear evidence connecting them.
The takeaway: if you're keeping assets back from a sale, keep the paperwork too. Document your intentions and cost allocations as you go — "vague and general" won't survive a challenge.
CJEU/EU General Court
Judgment - T-268/25 – Sampension Livsforsikring A/S
VAT grouping: full ownership isn't always required, says European court
Denmark's tax authority has lost a long-running fight over how tightly companies must be tied together before they can join a VAT group — and the judgment has implications well beyond Denmark's borders.
Sampension, a partly exempt insurance business, wanted to set up a VAT group made up of two group companies: an insurance company making exempt supplies, and a management company it owned 94%. Danish law demands 100% common ownership before a fully exempt or non-business entity can join a VAT group so the application was refused.
The case went to the European Court, which had to decide whether that 100% rule complies with Article 11 of the Principal VAT Directive. Article 11 lets member states treat closely bound businesses as a single taxable person for VAT, but it only requires them to be tied by financial, economic and organisational links. It says nothing about 100% ownership.
The Court decided close financial links can exist below 100% ownership. A blanket rule that demands full ownership isn't automatically justified by Article 11 itself.
A tax advantage from VAT grouping isn't evidence of avoidance. Businesses are free to structure themselves to manage their tax position, and a reduction in tax take that simply reflects a member state's decision to allow VAT grouping doesn't count as evasion or avoidance.
A restriction has to genuinely and consistently target real risk. Denmark's 100% test draws the line at capital structure, not at actual risk of avoidance — and a fully exempt entity carries the same VAT advantage whether it's owned at 100% or 94%. A rule like this is likely to go further than necessary and could also breach fiscal neutrality by treating comparable businesses differently.
It is still for the Danish courts to test whether the 100% requirement is a proportionate way to prevent avoidance, or whether a less restrictive rule would do the job. The court also confirmed that Article 11 has no direct effect, so Danish businesses can't rely on it directly until Denmark changes its domestic law.
Why this matters here: The judgment isn't binding in the UK. But it's a useful read on how VAT grouping eligibility is tested elsewhere, and it sharpens the argument that tax authorities should assess avoidance risk case by case, rather than screening out entire structures with a fixed ownership threshold. The normal savings that come from grouping, no VAT on intra-group supplies, are not, on their own, evidence of anything untoward.
HMRC/HMT
Compassionate Medicines Scheme - UK Parliament and Compassionate Use Medicine Schemes: VAT - Hansard - UK Parliament
According to Hansard, an announcement may be on the way concerning the VAT implications of the compassionate medicines scheme, which allows the use of unlicensed or not-yet-authorised medicines by patients with serious, life‑threatening or debilitating conditions who have no other satisfactory treatment options.
In 2023, HMRC is understood to have written to pharmaceutical businesses taking the view that the provision of these medicines free of charge to patients was a deemed supply for VAT purposes if the supplier had previously recovered input VAT on their purchase or development. That meant pharmaceutical companies supplying medicines for free under compassionate use or early access schemes could face a VAT charge.
However, on 23 June 2026, Dan Tomlinson MP, Exchequer Secretary to the Treasury, answered a question in Parliament which indicates that the Government will soon bring forward a new approach, consisting of either changes to the VAT rules or a reimbursement scheme. The changes will be effective for donations of medicines made on or after 23 June 2026.
Comment: At the time of writing, we have no further information on exactly what changes are planned and will watch out for any announcements by HMRC. In the meantime, you should be aware change is on the way and could possibly be backdated to cover supplies made on or after 23 June 2026.
Capital Goods Scheme simplification
HMRC has published a Policy Paper, legislation and an updated Public Notice confirming that its proposed updates to the Capital Goods Scheme came into force on 29 July 2026.
From that date:
- 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 Capital Goods Scheme (CGS) will now only apply to land, buildings and civil engineering works, where the capital expenditure on these assets is £600,000 or more
- 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
HMRC adds that the new threshold value and the removal of computers from the scheme will only apply where an owner has not incurred any capital expenditure on the item before 29 July 2026.
Therefore, the new £600,000 threshold for land, buildings and civil engineering work will only apply to brand new projects where no capital expenditure has been incurred before 29 July 2026. The policy paper appears to say that, where capital expenditure was incurred before that date, the old threshold of £250,000 will apply, even if the new capital item is not ready to use until after that date.
The statutory instrument enacting the CGS changes does not amend the rules for boats and aircraft so it seems HMRC intend to leave these within the scope of the CGS, keeping their threshold at £50,000 with a “life” of five years.
Comment: These changes were first announced in April 2025, and we finally have HMRC’s confirmation of their effective date and how the transition from the old rules to the new rules will work. While most commentators have welcomed HMRC’s acceptance that the CGS threshold was set too low, many have complained that the increase is too small to take a significant number of capital projects outside the CGS and fear that the changes may cause some practical problems for organisations that use the capital goods scheme.
VAT provisions for Deposit Return Schemes (DRS)
Deposit return schemes: who actually pays the VAT?
From October 2027, drinks sold in single-use aluminium and plastic containers will carry a 20p deposit under new deposit return schemes for Scotland, Wales, and England and Northern Ireland. HMRC has now published draft legislation confirming how VAT will work — and it is good news for most of the supply chain.
The headline point: if you produce, import, wholesale or retail drinks in scope, you won't be accounting for VAT on the deposit yourself.
Here's how it works. The deposit is ignored for VAT purposes all the way through the supply chain you charge (or pay) it, but you don't charge VAT on it. If the customer returns the container and gets their 20p back, that's the end of the story; no VAT ever arises.
But not every container comes back. When one doesn't, that 20p stops being a refundable deposit and becomes retained income within the scheme. HMRC's view is straightforward: VAT should be paid on it. The twist is who pays it. Under the draft rules, that responsibility sits with the scheme administrator — the UK Deposit Management Organisation, for example — not with you. The administrator's VAT bill is simply the deposit income it receives, less the refunds it pays out.
What this means for you: if you sell drinks in scope, the deposit itself shouldn't add to your VAT compliance burden. The detail on exactly how administrators will account for the VAT, and how errors get corrected, is still to come, in regulations and a public notice expected after the Finance Bill 2026-27 receives Royal Assent.
We will flag the next steps as they land. In the meantime, if you've been worrying about accounting for VAT on unreturned containers, this is one you can move off your list.
One thing still on it, though: you'll need a system in place to charge, track and reconcile the 20p itself, even if the VAT sits elsewhere. That is a process and systems question as much as a tax one that is worth considering well before October 2027.
Reforming the customs treatment of low value imports into the United Kingdom – consultation response & Reforming customs rules for low value imports
Low value imports: the £135 customs threshold is going – here's what's changing
The government has confirmed it's scrapping the £135 customs duty threshold. If you sell goods into the UK from overseas or run an online marketplace that helps others do so, this is worth your attention now – not in 2028 when it lands.
What is happening: Most consignments worth £135 or less currently come in free of customs duty. That relief is going. A new low value import (LVI) regime will apply instead, covering consignments of £135 or less sent from outside the UK to a UK business or consumer. The seller, or the marketplace facilitating the sale, will be liable for the duty. There's no simplified tariff – goods still need classifying under the UK Global Tariff, as with standard imports.
The timeline: The new regime will be in force by October 2028 at the latest. Two years sounds like plenty of time. It isn't, once you factor in appointing a fiscal representative and building the compliance processes behind it.
Five things to know:
- Fiscal representatives will be required for overseas sellers and marketplaces without a UK establishment, despite concerns about limited appetite among UK agents to take this on, given the legal and financial exposure.
- Duty is paid quarterly, with the option to align this with VAT return periods.
- Preferential rates still need a full customs entry – the simplified LVI route won't cover them, though government says it will explore ways to change this.
- A handling fee is coming to cover Border Force's costs. The method – per consignment or per product – isn't settled, though a per-consignment fee is the frontrunner.
- Item-level data is required: description, value and weight per item, with a unique reference number per consignment.
Why it matters now: Two years feels comfortable until you map out what is needed: appointing a fiscal representative, adapting systems for item-level data, and working out how duty and the handling fee affect pricing – particularly for retailers with high return rates, where the fee could apply more than once per sale.
Detail is still to come, but the direction of travel is set. Businesses that start planning now will be better placed when it lands.
If you sell into the UK from overseas, or run a marketplace that does, talk to us about what this means for you.
Modernising the correction of errors
HMRC is about to make correcting errors a legal duty. Here's what it means for indirect tax.
Spot a mistake on a return, and today you have choices about how quickly to put it right. Draft legislation published in July could turn that choice into an obligation, with penalties for anyone who doesn't act.
What's changing: As part of the Tax Administration Framework Review, HMRC has published draft legislation introducing a new "customer correction notice". Where HMRC has reason to believe a document contains an inaccuracy, it can issue a notice requiring the taxpayer to correct it or explain why no correction is needed. Sit on the notice, and the error is automatically treated as deliberate for penalty purposes.
Why this matters for indirect tax: Earlier consultations didn't specifically flag VAT. But the draft legislation applies to every return covered by Schedule 24 of the Finance Act 2007, which includes VAT and several other indirect taxes. If you complete VAT returns, or advise clients who do, this will affect you.
The penalty point: Failing to respond to a notice within the set period means the related error is penalised at the deliberate rate: currently up to 70% of the tax at stake, rather than the lower rate for a careless mistake. In effect, HMRC's nudge letters are about to get statutory teeth, what has been a voluntary response until now becomes a legal one.
Timeline and what to do now: The measure sits in Finance Bill 2026-27, with no start date confirmed yet. HMRC is inviting feedback on the draft legislation until 7 September 2026. In the meantime, treat any nudge letter or correction notice as something needing a documented, timely response and let us know if you'd like to comment on the draft before September.
