Summary
In this indirect tax update, we provide insight into the more important legal disputes from the Courts and Tribunals in the last two months. We have a wide range of subject matter, from VAT recovery on sale of shares (Hotel La Tour), dispute management (FS Commercial and Medpro Healthcare), whether phone bundles amount to vouchers (Lycamobile UK), hair loss remedies (Mark Glenn), the disapplication of the option to tax (Nissi N Nissi), reasonable excuse (Julian Partnership), import VAT claimed on clinical trials as non-owner (Yourway Transport) to the interaction of transfer pricing adjustments with VAT (Stellantis Portugal).
News from the UK Courts and Tribunals
UK Supreme Court
[2025] UKSC 46 Hotel La Tour Limited
The Supreme Court has found in favour of HMRC in the Hotel La Tour appeal, which considers a business’s entitlement to recover VAT incurred when selling the shares of a subsidiary company to a new owner. For more details see our case alert [ 606 kb ].
Court of Appeal
[2026] EWCA Civ 29 FS Commercial Limited
The Court of Appeal (CoA) has endorsed the approach taken by the First Tier Tribunal (FTT) and confirmed by the Upper Tribunal (UT).
This was a curious case of a company claiming large amounts of input tax then failing to provide invoice evidence to HMRC when requested. It subsequently appealed to the FTT and only at the hearing providing thousands of invoices as evidence, which were deemed to be too late. The UT concluded that the FTT had acted properly in its supervisory capacity (there was even criticism that that the operation of the VAT system is not a game to be played by taxpayers).
Comment: When HMRC ask for evidence to support input tax claims, the best approach is to provide it in a timely manner.
[2026] EWCA Civ 14 Medpro Healthcare Ltd
This was an appeal by HMRC on the procedure to be followed by the FTT when it is considering whether to allow a late appeal. In summary, the Court said the UT decision in Medpro was flawed, and when the case procedure (and similar late appeal disputes) are considered, the correct guidance for the FTT to follow is that provided by the UT in In Martland v HMRC [2018] UKUT 178 (TCC).
As a reminder the approach endorsed in Martland requires the FTT to undertake a three-step process: establish the length of the delay in making the application; establish the reason(s) for that delay and evaluate all the circumstances of the case.
Comment: There is a high bar for acceptance of a late appeal, so the recommendation must be to avoid this risk, take time limits seriously and get the appeal submitted in time.
Upper Tribunal (UT)
[2026] UKUT 00074 (TCC) Lycamobile UK Ltd
In July 2024 the FTT rejected Lycamobile UK's (LMUK) claim that its prepaid phone plans amounted to face value vouchers (thus delaying the need to account for output tax) and concluded that VAT was due when payment was received. LMUK appealed to the Upper Tribunal on four grounds, described below, but its appeal was dismissed.
Firstly, LMUK argued that Plan Bundles were merely rights to future services, comparable to points or credits in other disputes and so VAT should arise only when minutes, texts or data were actually consumed. The UT upheld the FTT’s finding that the real supply occurs on sale, because customers purchase availability of telecoms services for a fixed period, not a currency for future exchange.
Secondly, LMUK said Value Added Services (VAS) (e.g., roaming or content access) were separate supplies and their uncertainty undermined the FTT’s analysis. The UT decided the FTT findings, based on customer behaviour and economic reality, that VAS were ancillary to the main supply of of the phone plan allowances meant they should have the same VAT treatment.
The third and fourth arguments were that the bundles were multi-purpose vouchers (post‑2019) or face value vouchers (up to 2019), but the UT said they were not instruments accepted as consideration when the allowances were used, nor did they meet the statutory definitions of face value vouchers, because they were not expressed in monetary terms.
Comment: The lesson is that subscription services which provide access to services are taxed at the point of sale. In order to delay the VAT, and or avoid accounting for VAT on the unused services, it would be vital to carefully restructure the offering as a voucher, but this may have undesirable commercial consequences.
[2026] UKUT 34 (TCC) Mark Glenn Ltd
The UT has reversed the FTT decision in this appeal, which involved the company treating its sophisticated hair loss replacement system for women as zero rated. The FTT found that it was neither a medical treatment (the company did not employ medically qualified staff) nor did it provide or adapt goods for the chronically sick or disabled. Therefore, the services provided of interweaving new hair and anchoring it to existing healthy hair was standard rated.
However, the taxpayer appealed with the successful grounds being that the FTT had not adequately explained its reasons, and that FTT conclusion that women's hair loss could not amount to a disability was wrong. The UT agreed on these points and re-made the decision in favour of the taxpayer.
First-tier Tax Tribunal (FTT)
TC09778 Nissi N Nissi Limited
This was an appeal by a property development company (NNN) that bought and developed premises intended for and actually used by another company as a Children's Nursery (SSN). HMRC investigated the repayment claims and concluded that disapplication of the option to tax rules in paragraph 12 of Schedule 10 worked against the taxpayer.
The amounts spent were well in excess of the capital goods scheme limit, and the company appealed. The FTT found that SSN and NNN had transferred money between the accounts as if there was a single business and that some of the funds were transferred in respect of the development works, and this was sufficient (despite the appellant's argument that the amounts were de minimis) to make SSN a 'development financier'.
The Tribunal also found that the premises were intended to be used for exempt purposes (SSN was not registered for VAT since its nursery services were exempt), and therefore NNN's option to tax was disapplied. The appeal was dismissed.
Comment: The anti-avoidance rules in Schedule 10 are complicated and not easy to understand on first reading. However, this appears to be a clear case that the disapplication of the option to tax is the right answer.
TC09779 Genuine Care Homecare Services LTD
The FTT has confirmed that Genuine Care, which provides exempt care services to its clients, should have accounted for UK VAT under the reverse charge on services received from Atena, a Slovakian staffing business.
Genuine Care argued that Atena supplied welfare services directly to patients (i.e., B2C supplies in Slovakia) and that Genuine Care acted only as an introducing agent. On this basis they said no UK VAT was due.
HMRC disagreed, treating the arrangement as Atena supplying staff to Genuine Care—standard‑rated in the UK under the reverse charge—and backdated Genuine Care’s VAT registration to 2016. HMRC also issued assessments and a penalty for failure to notify.
The contracts were unclear, so the Tribunal considered the economic and operational reality that Genuine Care controlled key aspects of the work (assessing patients, designing care plans, arranging accommodation and transport, conducting training/DBS checks, and invoicing patients) and Atena had no real involvement in care planning, lacked insurance, and had no control over staff.
The Tribunal also rejected the argument that Genuine Care was an undisclosed agent receiving exempt welfare services, because exemption requires UK regulatory status, which Atena did not have.
In addition, the late registration penalty was upheld as taking advice in 2021 was not a reasonable excuse for an error dating back to 2016.
Comment: The problem arose because Genuine Care did not properly consider the VAT position when the contract with Atena was set up, and only tried to construct arguments afterwards to mitigate HMRC’s assessments. A key lesson is that care sector outsourcing arrangements should be reviewed at the outset to ensure the correct VAT treatment otherwise very significant VAT liabilities and penalties can accrue.
TC09768 Mr & Mrs Julian
The Julian Partnership failed to notify its VAT registration requirement after rule changes to the Agricultural Flat Rate Scheme took effect in 2021. Neither the partners nor their nonspecialist accountants knew about the change, which had been buried in technical budget documents. Once discovered in 2023, they voluntarily disclosed the issue and paid £500,000 in VAT, but HMRC imposed a £43,000 penalty.
The FTT cancelled the penalty, finding it objectively reasonable that the partnership was unaware of the poorly publicised rule change. It highlighted their remote location, reliance on generalist accountants, and the impracticality of expecting taxpayers to monitor HMRC updates continuously. The Tribunal confirmed that ignorance of the law can amount to a reasonable excuse when the requirement is complex or obscure.
TC09749 Yourway Transport Limited
Yourway has been partially successful in its dispute with HMRC. Yourway imported clinical trial drugs into the UK for non-UK biopharma clients, storing and distributing them—mostly to EU clinics—free of charge. HMRC denied over £4.3m of input tax on the basis that Yourway did not own the goods.
The Tribunal considered whether the import VAT was recoverable by examining whether the drugs were used for the purpose of Yourway’s business; and whether the VAT was attributable to taxable supplies made by Yourway.
A key issue was VAT Act 1994 s.47(1), which treats an agent acting in its own name as the principal for VAT on goods. The FTT found as fact that Yourway never owned the drugs, but it was the importer of record, acted in its own name (meaning the clinics thought they were dealing directly with Yourway, not the biopharma companies), controlled storage and delivery, and provided complex logistical services.
Yourway was successful in respect of EU destined drugs before Brexit as it acted as agent in its own name. Under the agency rules and the detailed rules on supply of goods to the EU (now repealed) it was deemed to have made a taxable supply, creating the necessary direct and immediate link. Therefore, import VAT was recoverable for EU destined drugs.
UK or non-EU destined drugs:
No deemed supply arose because there was no consideration under the detailed supply of goods rules. Without a supply, the agency analysis was not effective. Thus, import VAT was not recoverable for these drugs.
Comment: The success for EU destined drugs has limited relevance post Brexit. Potential solutions include using an EU storage location with similar agency rules, having the biopharma company act as importer of record, using the UK equivalent of the 13th Directive, or employing customs warehousing to defer import VAT.
TC09739 Nimbus: The Disability Consultancy Service Limited
The FTT has confirmed the Access Cards provided after assessments for individuals with disabilities, and reflecting their specific accessibility requirements can be zero rated as equipment designed solely for a disabled person. The card displays standardised symbols (e.g., inability to stand or queue, wheelchair access needs, limited mobility, essential companion requirements, and assistance dog support). Many organisations formally recognise or voluntarily accept the card, which also grants access to Nimbus’s booking platform, the Nimbus Operating System (NOS).
Nimbus previously applied standard rated VAT to the card but sought confirmation in 2022 that it qualified for zero rating as an aid for the disabled but HMRC refused, and Nimbus appealed.
Before the FTT, debate arose as to whether the card constituted a supply of goods or services. Although the card remained Nimbus’s property and was valid for three years, the Tribunal found that it was supplied for consideration for a defined period and therefore amounted to a letting on hire and was designed as an aid solely for disabled people. On this basis, zero rating applies.
TC09731 Littlewoods Limited (product photography costs incurred by online retailer – whether related to taxable sales of goods or also to consumer credit and insurance offering)
Littlewoods, part of a VAT group selling retail goods online with optional credit and insurance, incurred £2.3m of VAT on product‑specific photographs. HMRC rejected recovery, arguing the images also supported exempt finance supplies. The FTT disagreed, finding the photographs were used solely to promote taxable sales of goods, creating a direct and immediate link to those supplies. It emphasised a component‑by‑component attribution test and noted the photos did not promote credit or insurance, which were displayed separately. The Tribunal aligned the case with Sofology and distinguished N Brown and Roald Dahl Museum, concluding full VAT recovery was justified.
TC09722 W M Morrison Supermarkets Ltd
Are Cool Down Rotisserie Chickens standard rated as Hot Food? - Yes
Morrisons sold two types of rotisserie chickens: those kept hot in heated shelves (standard rated) and 'Cool Down Rotisserie Chickens' (CDRCs), which were left to cool on unheated shelves and treated as zero-rated until HMRC challenged this. The FTT had to consider (1) whether CDRCs were 'hot food', (2) whether it had jurisdiction to consider a legitimate expectation claim, and (3) whether Morrisons had such an expectation.
Applying the detailed notes to the food VAT liability schedule, the Tribunal found CDRCs were hot at the time of supply and met several statutory indicators of 'hot food', including being kept hot after cooking and supplied in heat retentive packaging. Meeting any one test is sufficient, so CDRCs were held to be standard rated.
The Tribunal also decided it did have jurisdiction to consider legitimate expectation but rejected Morrisons’ argument: HMRC had issued no clear ruling, Morrisons failed to disclose key facts (packaging and the two-hour window to sell cooling down foods), and HMRC guidance could not create a binding expectation. Given the large amount of tax at stake (around £17m), an appeal is likely.
TC09710 Athena Luxe Limited
Are till receipts accompanying tax invoices adequate evidence to recovery input tax?
Athena purchases luxury goods from UK retailers such as Harrods and Louis Vuitton to fulfil specific customer orders, predominantly for clients in Hong Kong. As a regular repayment trader, its VAT returns were reviewed by HMRC, which challenged the validity of certain tax invoices.
For Harrods purchases, Athena obtained till receipts and subsequently requested tax invoices addressed to the company. Although HMRC argued that the invoices lacked sufficient detail to identify the goods, the FTT held—applying the principle from Fount Construction—that a tax invoice functions as a gateway to HMRC’s enquiries. Because the till receipts provided the necessary detail, the invoices were deemed valid.
For Louis Vuitton purchases, the tax invoices were issued in the name of a director or employee, and Louis Vuitton refused to reissue them correctly. HMRC rejected the invoices as improperly addressed. The FTT found that HMRC had acted unreasonably in failing to exercise its discretion to allow VAT recovery, referencing Hotelbeds. With no evidence of avoidance or evasion, a refusal to apply discretion was unjustified.
Overall, while HMRC seeks to ensure correct VAT outcomes, this case illustrates that its litigation strategy can at times be misdirected.
TC09725 Story Terrace Limited - whether ghost written autobiographies are zero rated books or standard rated writing services
The Tribunal held that Story Terrace’s product was predominantly the supply of a physical book, not a supply of ghost-writing services. Although the books were bespoke, the Tribunal found that the typical consumer’s main aim was to receive a professionally produced physical book—usually 30 copies—to share with others. The physical book therefore constituted the most important element of the transaction. Reflecting the commercial and economic reality, the Tribunal concluded that the supply was zero-rated as a book. The commentary notes that this aligns with the 'typical consumer' test from Gray & Farrar and questions why HMRC pursued the case given the contract clearly required delivery of physical books.
TC09729 D Nuttall UK Limited - input tax on truck fuel and repairs
Nuttall, a haulage business, sought to recover input VAT on fuel and maintenance costs for trucks it used but did not own. The trucks were owned by ROBO, a Romanian company, under a poorly drafted contract suggesting ROBO provided 'transports'. HMRC argued the supplies were made to ROBO—so Nuttall could not recover the VAT—while Nuttall contended it effectively hired and operated the trucks.
The Tribunal accepted that although the contract pointed towards supplies being made to ROBO, the economic reality showed Nuttall controlled all operational aspects (fuel, maintenance, drivers) and bore the commercial risk, while ROBO simply provided the trucks and paid insurance/road tax. Therefore, the supplies were effectively made to Nuttall, allowing VAT recovery.
The appeal was allowed, with around £285,000 of input tax recoverable. The Tribunal noted Nuttall was 'fortunate' given the contract did not reflect the true commercial arrangement.
Court of Justice of the European Union – Judgements
Case T-575/24 Digipolis - Belgium
The case concerns whether Digipolis, a Belgian publiclaw association providing telematics and IT services to its members, is a taxable person for VAT. The Court held that member payments were direct consideration for identifiable services, meaning the activities were taxable supplies. Digipolis operated over many years, occasionally served third parties, bore economic risk, and had its own legal personality—so it conducted an independent economic activity. The public authority exemption did not apply because the services were provided under marketlike conditions and risked distorting competition.
Case T-638/24 D GmBH - Austria
D (an Austrian Company) bought goods from other Austrian businesses for delivery directly to customers in other EU member states. Instead of providing non AU VAT numbers to enable to the other Austrian businesses to zero rate their dispatches D provided its own AU VAT number.
The suppliers therefore added AU VAT to their invoices which D sought to recover. The AU tax authority refused the refund claim saying AU VAT was incorrectly charged, but it was still due from the suppliers (because output VAT was stated on the invoices).
Comment: The Judgement indicates that the AU tax authority was allowed to take the action it did, and the remedy is for D to prove an acquisition outside Austria, and for the suppliers to correct their invoices. However, since the transactions happened in 2011 to 2015 it may be too late to get corrected invoices from the suppliers. Given that the UK is no longer in the EU, the case will have limited application in the UK unless the supplier is based in Northern Ireland.
C-379/24 & C-380/24 Agrupació de Neteja Sanitaria & Educat Serveis Auxiliars
The Court considered whether Spanish cost sharing groups providing cleaning services to schools and hospitals could rely on the EU VAT cost sharing exemption in Article 132(1)(f) of the VAT Directive.
Spain had refused the exemption on the basis that the services were subcontracted, were too general to be 'exclusive' to exempt activities and could distort competition. The Court rejected these arguments, confirming that services need only be 'directly necessary' for exempt activities, even if general in nature, and that cleaning meets this test given strict sector specific hygiene standards. It also ruled that Member States cannot presume competitive distortion simply because the services could be used for taxable purposes. The decision clarifies that general services can qualify for the exemption. Although not binding in the UK, it may still be persuasive, noting HMRC applies a narrower 'wholly attributable' approach in its relevant guidance.
Court of Justice of the European Union - Advocate General Opinions
Case T‑184/25 A Oy - Finland - securitisation of mortgage debts and subsequent management of those debts
Background: A is a Finnish financial institution that provides domestic mortgages. Its business model provides that immediately after the mortgage funds are advanced to the borrower, it bundles up a number of mortgages and sells them to B (in this case a related company). B then issues bonds secured on the bundle of mortgages. A continues to represent itself to the borrowers (they are not aware of the transactions with B) and undertakes management of the mortgage loans - collecting payments, providing statements, redemption figures etc. A charges B for those management costs and the question of the VAT liability arose in a ruling request to the Finnish tax authority.
The VAT directive exempts 'the granting and the negotiation of credit and the management of credit by the person granting it'.
The AG looked for the historical reasons behind the personal limitation in this exemption but could not find anything persuasive that would assist. He goes on to say that, because the management of credit by a third party when provided to B would be taxable this should also apply to the services provided by A to B. The AG's opinion is not the final word on the referral, and we will have to wait to see the Judgement of the Court in due course. As B now owns the mortgage debt, it is curious that the AG is discounting the 'person granting [the credit]' being A who is providing the credit management services. There seems to be an argument that the exemption should still apply.
Case C‑603/24 Stellantis Portugal
The Advocate General’s Opinion in Stellantis Portugal considers whether end‑of‑period transfer‑pricing adjustments within a corporate group amount to a separate VATable supply of services. Stellantis Portugal, acting as the national sales company, bought vehicles from EU manufacturers and resold them to independent dealers. Warranty and distribution costs were handled through a contractual profit‑allocation mechanism, with transfer prices later adjusted to ensure an agreed profit level. The Portuguese tax authority argued that a downward adjustment, supported by a credit note was consideration for services provided by Stellantis to the manufacturers.
The Advocate General rejects this, stating that price adjustments cannot constitute supplies of services, nor can 'negative consideration'. Simply bearing warranty or distribution costs does not amount to a service because there is no payment in return for a supply. Group profit‑allocation mechanisms are irrelevant for VAT. The Opinion distinguishes three situations: (1) genuine, contractually remunerated services, (2) unilateral tax‑authority adjustments (irrelevant for VAT), and (3) variable contractual pricing linked to specific supplies—applicable here. Such adjustments merely modify the taxable amount of the original supply under Articles 73 and 90 of the VAT Directive. The adjustment therefore affects only the original supply of goods, not a separate supply of services.
Comment: When the Judgement is published we hope to have clearer guidance on the interaction between transfer pricing and VAT, and this will add to the limited advice provided in the Arcomet Cranes case.
Other news from HMRC
HMRC Manuals - VAEC1111 VAT Assessments and Error Correction
On 24 February 2026 HMRC made extensive changes to provide information on how the discretion allowed in section 73 VATA 1994 (not to assess for underpayment of net tax) operates and why it is to be used only in exceptional circumstances.
Where a taxpayer has been incorrectly charged VAT, HMRC make it clear that they will assess for overclaimed VAT, and claim that tax neutrality applies should be rejected. HMRC assert that a claim should be made against the supplier as a commercial matter.
It should also be remembered that HMRC will also charge interest in these circumstances and the differential rates between interest charged by HMRC and interest paid by HMRC is a significant factor. Recipients of supplies where the VAT liability is in doubt should take extra care.