Indirect tax updates

Welcome to this edition of our Indirect Tax Update, bringing you the latest VAT developments from the Court of Justice of the European Union (CJEU), the UK courts and tribunals, and HMRC.

Summary

The standout story this month is HMRC's response to its Court of Appeal defeat in St Patrick's International College, a case that could reshape who can supply exempt education in the UK. HMRC is fighting on but is inviting affected providers to submit protective claims in the meantime. Elsewhere, the CJEU has been busy: one judgment tightens the rules on VAT grouping, and another draws a hard line on the Tour Operators' Margin Scheme (TOMS). Closer to home, the tribunals have handed down decisions on fraud knowledge, motor car input tax, and outsourced payroll arrangements. And HMRC has quietly changed the rules on how overseas members of a VAT group can reclaim UK VAT. We cover each in turn below.

News from the CJEU

VAT grouping: 100% ownership condition struck down

On 15 July 2026, the General Court of the European Union ruled in Sampension Livsforsikring (case T-268/25) that Article 11 of the VAT Directive prevents a member state from making VAT group membership conditional on one member holding 100% of the capital of the others, unless that condition can be justified as a necessary and proportionate measure to prevent tax evasion or avoidance.

The case concerned a Danish rule requiring full ownership before two entities could form a VAT group. The taxpayer, an insurance company, had grouped with its management company while it held the whole of that company's capital; the arrangement was challenged once ownership fell below 100%. The Court held that Article 11 requires only "close financial, economic and organisational links" between group members, and that a blanket full-ownership requirement goes beyond what is needed to establish those links or to guard against abuse.

While this is a Danish reference, it matters for UK groups too. The reasoning reinforces that VAT grouping conditions must be proportionate to their anti-avoidance purpose, a principle that resurfaces regularly in disputes over UK grouping eligibility, particularly for partly owned joint ventures and minority-stake structures.

Tour Operators' Margin Scheme: no cross-border loss offsetting

On 10 September 2026, the CJEU handed down its judgment in P-GmbH & Co. KG (case C-565/24), a case on the interaction between TOMS and the sale of goods.

The taxpayer ran a structurally loss-making travel business alongside a profitable goods business and argued that its VAT position should reflect the combined economic outcome. The Court disagreed. It held that TOMS margins must be calculated on the travel element alone, without setting losses on travel services against profits from unrelated supplies of goods, and without shifting the resulting VAT burden to the member state where the travel agent is established. The Court noted, pointedly, that the taxpayer had chosen its loss-making business model with its eyes open.

The judgment is a reminder that TOMS remains a strictly ring-fenced calculation. Businesses combining margin-scheme travel supplies with other trading activities should keep the two clearly separated for VAT purposes, rather than looking to net them off.  However, the effect of this decision on the UK is limited, because HMRC policy is that, unlike EU member states, all margin scheme supplies are aggregated on an annual basis when calculating the margin subject to VAT.

News from the UK Courts and Tribunals

St Patrick's International College: exemption endorsed, appeal to follow

The most significant recent UK VAT decision this year arguably remains St Patrick's International College and Others Ltd v HMRC [2026] EWCA Civ 852. The Court of Appeal overturned the First-tier and Upper Tribunals, ruling in favour of the college and its co-appellants, commercial higher education providers that are not "eligible bodies" for VAT purposes.

The Court held it was bound by its own 2020 decision in Leisure, Independence, Friendship and Enablement Services Ltd (LIFE), which established that fiscal neutrality must be judged from the perspective of the typical consumer. Applying that test, the Court found that students would regard the appellants' courses as materially like those offered by exempt providers, so denying exemption breached fiscal neutrality, even though the exemption in UK law includes an "eligible body" condition that the appellants did not meet.

HMRC's response, and what it means for claims, is covered in the HMRC section below.

Fraud knowledge: Upper Tribunal backs findings of fact

In Eurolaser IT Ltd v HMRC [2026] UKUT 324 (TCC), the Upper Tribunal dismissed an appeal against findings that a consultant's knowledge of VAT fraud (applying the Kittel and Mecsek principles) was attributable to the company that engaged him. The consultant's past involvement in fraudulent transactions, combined with the structure and trading pattern of the disputed deals, was enough to support the First-tier Tribunal's conclusion. The case is a useful reminder of how hard these factual findings are to dislodge on appeal, and of the weight tribunals can give to an individual's prior conduct.

Motor cars: intention at acquisition is what counts

In Luxurico Ltd v HMRC [2026] UKFTT 1252 (TC), the First-tier Tribunal allowed recovery of input tax on a very expensive car, despite gaps in the mileage records, because the taxpayer showed it had genuinely intended the vehicle for qualifying self-drive and chauffeured hire at the point of purchase. Evidence of advance bookings, self-drive hire insurance taken out on arrival, and active marketing all supported that intention, notwithstanding limited actual hire activity in the following months (attributed to Covid-19 disruption and repairs). The decision confirms that the test is the taxpayer's objective intention when the VAT is incurred, not simply what happened afterwards though complete, consistent records remain the safest way to support a claim.

Payroll outsourcing: no supply of staff

In ITS Plant-Tech Ltd v HMRC [2026] UKFTT 1299 (TC), the tribunal found that a company using outsourced payroll providers could not recover VAT charged on the wage and National Insurance elements of the payroll invoices. Because the company retained day-to-day control of the workers and continued to treat them as its own employees, the payroll companies were found to be supplying administration services only, not labour. The case highlights the need to look past the invoicing arrangement to the substance of who really employs and directs the workforce.

News from HMRC

Revenue and Customs Brief 9 (2026): education exemption — protective claims invited

Following the St Patrick's decision, HMRC has published Revenue and Customs Brief 9 (2026). HMRC confirms it disagrees with the Court of Appeal and maintains that supplies of education by providers that are not eligible bodies remain taxable; it has now been granted permission to appeal to the Supreme Court.

In the meantime, HMRC is inviting alternative providers who consider themselves in a similar position to St Patrick's to submit protective claims for a refund of VAT charged on their education supplies. Each claim will be reviewed case by case, with HMRC considering unjust enrichment, partial exemption, and whether VAT has been correctly accounted for across the wider supply chain — and normal statutory time limits continue to apply. Affected providers should not assume repayment is automatic, and should expect any repaid amounts to be protected by an assessment that HMRC could seek to enforce if its appeal to the Supreme Court succeeds. If that happens HMRC would charge interest on the money temporarily repaid.

Revenue and Customs Brief 8 (2026): VAT group refunds for overseas members

HMRC has also changed its approach to UK VAT refund claims made by non-UK businesses that belong to a VAT group. Previously, all claims had to be channelled through the group's UK representative member, which meant some businesses that had actually incurred the VAT could not claim it back. Under the new policy, each non-UK group member must submit its own claim, and HMRC will no longer accept claims from a representative member unless that member incurred the VAT itself. A transitional window allows claims for VAT incurred between 1 July 2025 and 30 June 2026 to still be submitted by the representative member, but only until 31 December 2026, so affected groups should review their claims process now.

GfC20: VAT on fund management services

Finally, HMRC has published new guidance (GfC20) setting out a recommended approach for determining whether outsourced fund management services should be treated as a single supply or multiple supplies for VAT purposes. The guidance lists indicators pointing each way and explains HMRC's reasoning, giving fund managers and their advisers a clearer framework for analysing these arrangements.

As always, this update is provided for general information. It should not be treated as advice on your specific circumstances, and we would encourage you to speak to your usual Grant Thornton contact before taking any action on the points covered above.