Weekly VAT News

Following the success of our first AI Tax University event in October, we will be hosting another running of the event on 3 February 2026 at our Churchill Place offices in London.

This one-day training workshop has been designed to provide attendees with a strong grounding in AI and the value it can deliver for tax functions. A large part of the day will focus on MS Copilot where we will run hands-on training on fundamental Copilot skills as well as exploring tax-specific use cases leveraging Copilot. A pre-requisite for attendees is to already hold a paid Copilot licence. The session is not available to EY audit clients.

The full-day event will take place on Tuesday 3 February 2026, 9:30 to 17:00 at our EY office in 25 Churchill Place, London.

To attend the session, fees are £2,000 (plus VAT) per person.

If you or other members of your tax team are interested in attending, or would like further information, please contact Liam Larke.

Agenda

Our next Indirect Tax Perspectives event will take place on Wednesday, 11 February. The event will take place in person at our 1 More London Place office, London, SE1 2AF. The session will run from 9:30 to 11:00, with networking and refreshments available from 8:45.

Following the main plenary sessions, we are also offering an optional session on AI indirect tax use cases which will run from 11:15 to 12:15, where we will showcase a number of AI use cases through solution demos.

During the event, we will cover:

• A round-up of the latest indirect tax topical issues
• E-invoicing update including guest speaker, HMRC’s Rachel Stirrat
• Trade Policy updates for UK businesses to monitor in 2026
• Gen AI update and indirect tax developments
• Optional session – Gen AI indirect tax use cases deep dive (11:15 to 12:15)

Following these presentations, we would be delighted if you could join us for lunch in our Forum Suite which will be available until 13:00.

Please register for the event and optional session here. There is also an option to opt into lunch; let us know if you have any dietary requirements.

For further information please contact Sarah Delaney.

It has been reported that the UK and South Korea have finalised a free trade deal. The deal includes continued and permanent tariff-free access across 98% of tariff lines (the same terms the EU has with South Korea), updated rules of origin which will simplify tariff-free access, and modernised rules for digital trade and AI.

A separate press release highlights some of the benefits of the new deal.

The US Court of International Trade (CIT) has ruled that it has authority to order reliquidation and refunds of International Emergency Economic Powers Act (IEEPA) tariffs if the US Supreme Court ultimately rules those tariffs unlawful.

The CIT declined to issue a preliminary injunction to halt liquidation (or finalisation) of entries subject to IEEPA tariffs, stating that refunds would be available through court-ordered reliquidation, thus finding no irreparable harm to the plaintiff.

According to the opinion, the Government has acknowledged that the court can order reliquidation and refunds and will not oppose such actions.

Businesses that paid IEEPA tariffs should compile entry records and trade data now to prepare for potential refund claims, while monitoring developments in the Supreme Court case, which is expected to conclude after the Supreme Court returns from recess on 9 January 2026.

Please refer to our Global Tax Alert for further details.

For further information please contact Marc Bunch or  Ross Freeman.

Thursday 15 January

Opinion – C-603/24 Stellantis Portugal

Topics – Valuation and minimum profit margin

A Portuguese referral which asks whether Article 2 of the Sixth VAT Directive, as worded in the version in force at the time of the facts, should be interpreted as meaning that the concept of the supply of services effected for consideration contained in that provision includes an adjustment of the sale price of vehicles which is duly provided for and determined in a contract concluded between the parties, in order to achieve a minimum profit margin, and which is documented by means of a credit or debit note issued to the applicant/appellant by the European manufacturers of the General Motors Group.

Thursday 22 January

Judgment – C-379/24 Agrupació de Neteja Sanitaria and C-380/24 Educat Serveis Auxiliars

Topics – VAT exemption – ancillary cleaning services – education and healthcare

Joined cases – These Spanish referrals ask, inter alia, whether national legislation which provides that ancillary services must be directly and exclusively attributable to an exempt activity to qualify for exemption, is contrary to the meaning and purpose intended by the EU legislature with the exemption contained in Article 132(1)(f) of the VAT Directive, where that stipulation is interpreted such that a service – cleaning in the area of education/health – is not considered to be ‘exclusive’ to that exempt sector, even though it is singular, technical and complex in its organisation, as well as absolutely necessary.

Topics – Sale of shares, recovery of VAT on professional services

Hotel La Tour Ltd

The Supreme Court has released its decision in this case concerning the recoverability of VAT arising from fees for professional services incurred in respect of the sale of shares by Hotel La Tour Ltd (HLT) in its subsidiary, Hotel La Tour Birmingham Ltd (HLTB).

At the material time, HLT was a holding company and owned the whole of the share capital of HLTB. HLT and HLTB formed a VAT group, with HLT as the representative member. HLTB owned and operated a luxury hotel in Birmingham under the name ‘Hotel La Tour’. HLT provided HLTB with management services and other services such as the provision of IP.

HLT decided to construct and develop a new hotel in Milton Keynes. To finance that development, it sought to sell the shares in HLTB for the highest price possible. It was not in dispute that HLT would use the proceeds so obtained for the development of the new Milton Keynes hotel.

HLT ultimately found a buyer and, as a result of the sale of the shares in HLTB, received approximately £16,000,000 in net proceeds. This comprised the consideration for the purchase of the shares and the repayment of HLT’s loan to HLTB, less the costs of sale including the fees for professional services.

HLT engaged various companies to provide professional services to assist with the sale including market research, buyer shortlisting, financial modelling, and tax compliance. This was with a view to obtaining the highest sale price available, which would provide for the largest sum possible to pay towards the Milton Keynes Development.

After initial challenge, HMRC ultimately accepted that HLT was carrying on an economic activity. HMRC maintained however that the input tax was not recoverable because the professional fees were used in making an exempt supply (sale of shares in HLTB).

Disagreeing with the First-tier Tribunal (FTT) and Upper Tribunal (UT), the Court of Appeal (CA) allowed HMRC’s appeal, holding that, in order to recover the VAT, a direct and immediate link needs to be identified between the input VAT and either the share sale or with the company’s business as a whole.

In this case, as there was a direct and immediate link between the costs and the exempt share sale, the input VAT was irrecoverable regardless of the ultimate fund-raising intention. In reaching its conclusion, the CA considered a number of significant cases including BLP, Midland Bank, Abbey National, Kretztechnik, Sveda, Frank A Smart and SKF.

In agreement with HMRC, the CA held that the UT failed to apply the direct and immediate link test and erred in disregarding the existence of the exempt share sale. The CA stated that the UT overestimated the changes in the CJEU jurisprudence post-BLP and got wrongly distracted into an analysis of where the costs were incorporated. The CA considered that these errors were sufficiently material for HMRC’s appeal to be allowed.

The CA further held that the existence of a VAT group between the two entities at the time of the share sale did not alter that conclusion. HLT supplied management services to HLTB, and it was that activity which meant that HLT was engaged in economic activity in the form of managing its subsidiary. That brought the share sale within the scope of economic activity as an exempt supply and VAT grouping did not allow those facts to be overlooked.

In this latest decision, the Supreme Court has unanimously dismissed the appeal, finding that the CA arrived at the correct result. The appeal must be dismissed because the disputed input VAT incurred by HLT is not deductible.

The Supreme Court considered that the CA correctly rejected the FTT and UT's interpretation of case law, particularly their reliance on how the price of shares in HLTB was determined to dismiss the possibility of a direct and immediate connection between the inputs and the share sale. The concept of a ‘costs component’ in establishing this direct link is not the standard used by the CJEU, even though that term is mentioned. There is no justification for analysing whether professional fees were factored into the share price calculation when this is not done for other types of transactions.

The Supreme Court went on to consider whether it matters that the sale of the shares in HLTB was an exempt transaction rather than ‘out of scope’ for VAT purposes. It recalled that case law establishes a clear distinction between transactions that are within the scope of the VAT regime but are exempt, and those that are out of scope. A transaction within scope is generally a transaction with which inputs have a direct and immediate link so that if that transaction is exempt, there is no deduction. However, if the transaction which consumes the inputs is out of scope, then the inputs can be attributed to the overall business, so that the extent of their deductibility depends on the composition of that overall business as between taxable, out of scope and exempt transactions.

It was asserted by HLT that the CJEU has in recent cases erased the distinction between exempt share sales and out of scope share sales. It argued that exempt transactions must be treated in the same way as out of scope transactions to comply with the principle of fiscal neutrality. That means that VAT incurred on fees for services acquired to assist with a share sale are directly and immediately linked with the general business of the taxable person regardless of whether the share sale is exempt or out of scope. The Supreme Court rejected this submission, finding that case law does not establish that fiscal neutrality should be treated as a governing principle that can justify ignoring the way the legislature has treated particular transactions as exempt or not.

The Supreme Court went on to consider HLT’s submission that the direct and immediate link test has been modified when it is applied to share sales to focus on the purpose of the transaction such that if the ‘exclusive reason’ for the share sale is to fund the taxable business, then it is directly and immediately linked with that business. The Supreme Court considered that the CJEU has not changed its previous rulings, which clearly reject the necessity of focusing on the purpose of raising funds. Additionally, introducing such a rule or altering the test for share sales would create confusion regarding the sources of funds a company uses for specific projects, especially since a company's revenues typically go into a common pool. This could also encourage companies to manipulate their financial records or communications to make it seem as though a share sale was or was not connected to a particular project, depending on what would be more advantageous for their tax situation.

In conclusion, the Supreme Court held that on the facts found by the FTT and applying the correct test, the direct and immediate link was between the inputs and the sale of the shares in HLTB rather than the overall hotel business of HLT. Since that share sale was exempt, the VAT paid on the professional fees was not deductible.

Finally, considering VAT grouping, the Supreme Court recalled that HLT and HLTB were in a VAT group for the purposes of section 43 VATA94 at the time HLTB was sold. Section 43(1)(a) provides that any supply of goods or services by a member of the group to another member of the group ‘shall be disregarded’. HLT argued that since HLT and HLTB were within the same VAT group at the time HLT provided management services to HLTB, those services fall to be ‘disregarded’. Since it was those services that led to the share sale being treated as an exempt economic activity rather than as out of scope of the VAT regime, disregarding them has the effect that the share sale is out of scope. That in turn means that the fees are directly and immediately linked to the overall business.

The Supreme Court rejected this argument, finding nothing in the CJEU’s case law that says that the effect of the VAT grouping is that supplies between the parent and its subsidiary are ignored for all purposes. Section 43 is designed to simplify and facilitate the collection of tax and not to confer exemption or relief from tax. Although they were members of the same VAT group, HLT and HLTB retained their individual identities. Economic activity was still taking place between them because HLT was engaged in managing its subsidiary and that amounts to economic activity for this purpose.

Comments: Following the judgment of the Court of Appeal, this confirmation of the orthodox position as understood before the FTT judgment in HLT is not unexpected. Whilst the judgment means that there is no simple path for a business to recover input tax that relates to a sale of shares, deal costs is an area where VAT is often not claimed correctly. Any business that has or will incur VAT on such costs should consider the VAT treatment. We have had plenty of experience of optimising VAT recovery by carrying out a more forensic analysis of the inputs in question and identifying direct and immediate links other than to share sales. Any business that is about to enter into a transaction should be considering the VAT implications early on, particularly in the context of the engagement terms with third parties.

For further information, please contact Alex Hale.

Topics – Attribution of costs incurred in the creation of product specific photographs for use in catalogues and/or in connection with an online retail store

Littlewoods Limited

Appeal allowed – The Appellant in this case was represented by EY.

The First-tier Tribunal (FTT) has released its decision in this case concerning a decision by HMRC to refuse claims made by Littlewoods Limited (LL) to recover input tax incurred on photography and modelling and other specific costs incurred in connection with product photographs.

LL is the representative member of a VAT group which includes various companies including Shop Direct Home Shopping Limited, which retails under brands including ‘Very’ and ‘Littlewoods’ and Shop Direct Finance Company Limited. At all relevant times LL operated in the online retail environment; prior to 2015 it also operated through catalogues. Customers choosing to purchase retail goods from LL have, also throughout the period relevant to this appeal, been offered financial products to facilitate their purchases. Some of these financial products are interest bearing.

LL also offers third party backed insurance cover for some of the retail products sold. As the supply of retail goods is a taxable supply for VAT purposes and the supply of financial services (both interest income and insurance intermediary commission) is an exempt supply, LL is a partially exempt business and only entitled to recover VAT incurred by it in so far as it is used for the purposes of making taxable supplies.

LL argues that the costs at issue are incurred only for the purposes of making taxable supplies and the VAT incurred should be fully recoverable. It contends that when determining whether there is a direct and immediate link between the costs and exempt supplies of interest-bearing credit and/or insurance, it is necessary to objectively determine the function and use of the inputs in respect of which the costs have been incurred and not the commercial context or ultimate aim of the business.

The costs at issue are product specific to goods sold by way of taxable retail sales; the photographs display the goods serving as a substitute for the physical display of goods in a bricks and mortar shop. They allow customers to inspect products virtually, view them from multiple angles, and make informed purchasing decisions. This reduces returns and enhances the customer experience. The photographs are not used to generally promote the business as a whole and make no reference to the exempt supplies of finance/insurance. Any connection to credit or insurance sales are necessarily indirect.

HMRC asserts that the costs are not used exclusively for taxable supplies. Rather, they are used to promote both LL’s taxable supplies of goods and its exempt supplies of credit and insurance intermediary services. This is predicated on two core submissions: (i) LL operates a single integrated business model involving the making of taxable and exempt supplies that are symbiotic to one another (Integrated Business Issue); and (ii) when considering the use to which the photographs are put on the website (and previously in the catalogues) objectively they are put to mixed use (Mixed Use Issue).

Integrated Business Issue

Distinguishing the immediate case from that of N Brown, the FTT noted that LL operates a business model founded on offering flexible payment options to the very significant majority of its customers. Over the periods covered by the various claims, LL identified those customers which represent the greatest value to its business. However, and unlike N Brown, a majority of LL’s customers choose a payment option under terms which enabled them to meet the cost of the goods purchased without bearing interest.

The FTT also noted that even if it had concluded that there was no relevant factual difference between LL and N Brown, it considered that the Tribunal in that case had applied the wrong legal test as now explained in Royal Opera House Covent Garden Foundation (ROH). Whilst ROH did not represent a paradigm shift in the test to be applied, it has provided an extended narrative to the approach dictated in Southern Primary.

The FTT considered that when seeking to identify a direct and immediate link, the principal focus is a myopic one. How were the costs used for the purposes of making supplies in the course of a business? Whilst the business sets the context for the supplies, it is identification of the link between the input in respect of which a particular cost was incurred and the supply to which that input is directly and immediately linked, or of which it forms a component, which determines the attribution question.

The direct and immediate link test is not driven by the economic interdependency of business operations. The FTT recalled that in ROH, at HMRC’s invitation, the Upper Tribunal and Court of Appeal were urged not to consider the possible existence of a direct link on a business macro level. The Court of Appeal accepted that the correct approach was to consider the issue at a micro transactional level. It concluded that a customer of the ROH could neither eat nor drink the production and so there was no direct and immediate link between production costs and catering. This was notwithstanding that the Opera House could not afford to put on productions without the income it generated from sales of food and drink.

Whilst accepting that LL’s business is one predicated on offering flexible payment options some (but not a majority) of which result in the exempt supply of credit with such exempt credit thereby facilitating sales and sales facilitating the provision of credit, the FTT did not consider that that is enough to establish a direct and immediate link between the photographs or the associated costs. For the costs to be mixed use it would need to be satisfied that they were used to make exempt supplies of credit and insurance.

Mixed Use Issue

Distinguishing the immediate case from that of Dial-a-Phone Ltd and Skipton, the FTT considered that when determining how the costs are used, it is necessary to bear in mind the nature of the costs i.e. modelling, studio, props etc.

At the first stage of the analysis, the costs are used to produce the photographs and accurately depict a single product for retail sale by LL. The photographs are used by LL as a component element of their website and formerly the catalogues. When so used they display the item depicted to potential customers in a manner consistent with the documents and evidence demonstrating their purpose. Together with the narrative description of the product, the photographs provide the potential customer with the details and specifications of the product to facilitate a decision whether to buy the goods. The photographs are also used to visually display the types of products sold within generalised departments, by way of dynamic feed to display a range of items likely to be of interest to the customer, and in search engine adverts. The FTT considered that by reference to the objective features of the photographs, even when put to their various uses, they are used to inform and display the product.

The FTT noted that the photographs do not mention or promote the credit/insurance services and the symbiotic relation between the sale of the goods and credit where it is taken is not enough on its own to establish a direct and immediate link to the credit transactions.

Considering whether use of the pictures alongside, and in close proximity to, information about flexible payment options is enough to establish a direct and immediate link to those financial services, the FTT suggested that it is not. The FTT held that there is no immediate connection to interest bearing credit. Even for a customer that can only afford to buy the product over an extended period, thereby requiring them to take interest-bearing credit, the photographs do no more than inform the customer about the product.

Undertaking a multifactorial exercise the FTT could not see that a set of photographs of, for example, a dress/bedside cabinet/pack of t-shirts, produced with the objectively discernible purpose of ensuring that the product is accurately displayed to a prospective customer is somehow converted from being exclusively linked to the supply of that product by being displayed with products of a different character, whether exempt supplies or otherwise.

In conclusion, and allowing the appeal, the FTT considered that each use made of the photographs was exclusively in the making of taxable supplies of retail goods. Any link to credit or insurance is, in its view, at the most indirect but given the nature of the costs probably non-existent.

For further information please contact Andy Jones or Mitchell Moss.

Comments: We worked with Littlewoods on this case. Partial exemption is complicated, and we are seeing a real focus in this area from HMRC, with some businesses receiving broad information requests and others deep in long running discussions pursuing ADR and litigation on various partial exemption issues. We have also seen HMRC appear to take contradictory positions in different cases – in RoH, they argued that it was not permissible to take an overall economic analysis, whilst that was very much the approach taken by HMRC in this appeal. Littlewood's success in this case demonstrates the importance of a keen focus on the details, and the preparation of a strong evidential case.

Topics – VAT recovery – costs incurred on fuel, repairs and maintenance for trucks owned by a third party

D Nuttall UK Limited

The First-tier Tribunal (FTT) has released its decision in this case concerning HMRC’s refusal to allow VAT recovery in respect of costs incurred by D Nuttall UK Limited (DN) on fuel, repairs and maintenance for trucks owned by a third party and used to deliver goods to DN’s clients.

DN submits that each of the disputed supplies was made to it whereas HMRC asserts that the supplies were made to the owner of the trucks, a Romanian company called S.C. ROBO International S.R.L (ROBO).

DN carries on an international haulage business, which transports goods for its clients from one location to another. It operates both in the UK and in continental Europe. During the relevant periods, it had its own trailers (in which goods were stored and transported) and its own warehousing facilities. However, it did not have its own trucks to pull the trailers and therefore needed access to trucks in order to carry on its operations. Access to the trucks was provided by ROBO, which at the relevant time was an independent company unrelated to DN. The trucks were driven by drivers almost all of whom were employees of DN, although a small number were employees of ROBO.

The FTT noted that as a matter of contract, it is clear that the agreement between the parties was that (i) ROBO would make supplies of transport services to DN, as opposed to simply making its trucks available; and (ii) in return, DN would make fixed payments to ROBO and meet all of the costs associated with the running of the trucks (including the fuel, the repairs and maintenance and the drivers) but not certain specified excluded costs.

In agreement with HMRC, the FTT considered that the purpose of the parties in entering into the contract was clearly that ROBO would provide transport services to DN and not merely make its trucks available, and that in doing so DN was able to take advantage of ROBO’s goods vehicle operator’s licence.

On this contractual analysis, even though each of the contracts for fuel, the repairs and maintenance was entered into by DN and the relevant provider of goods or services on a bilateral basis and ROBO was not a party to the relevant contract, the terms of the relevant contracts were such that DN was contracting with the provider in question not to provide goods or services to DN itself but instead to provide goods or services to ROBO on terms that DN would meet the cost of those goods or services.

However, considering whether this contractual analysis accorded with the economic and commercial reality of the arrangement, the FTT noted that ROBO made its trucks available to DN in return for the fixed payments and on the basis that DN would use the trucks in the course of its business. The economic and commercial reality of the arrangement was very clearly that DN would use the trucks as it had done when it previously held a goods vehicle operator’s licence and its own trucks. The only differences were that DN: (i) did not own the trucks; (ii) was not responsible for the excluded costs; and (iii) was obliged to make fixed payments to ROBO in return for obtaining access to the trucks.

The FTT considered that for HMRC’s assertions to be correct, there would have had to have been a much greater engagement by ROBO in the matters comprising the transport activities. The FTT could not see how ROBO could realistically be said to have provided transport services when all it did was make its trucks available to DN and take no responsibility for, or interest in, the way in which the trucks were then used.

In conclusion, the FTT held that it is DN and not ROBO which was entitled to claim a credit for the VAT attributable to the relevant supplies. Referring to the CJEU judgment in Vega, this analysis is not changed simply because the goods supplied, namely the fuel and the parts provided during the provision of repairs and maintenance, were installed in vehicles owned by ROBO.

The FTT also noted that its conclusion does not offend against the principle of fiscal neutrality. The costs incurred by DN in acquiring goods and services pursuant to the disputed supplies were cost components of its supplies to its customers. Accordingly, its ability to claim a credit for the VAT does not lead to a loss of VAT in the VAT system.

Comments: An interesting decision in which the FTT acknowledges that DN may be considered to be somewhat fortunate in having prevailed in this dispute. After entering into a contractual relationship with ROBO which bore no relationship to the economic and commercial reality of the arrangement between them, the FTT considered that it would not have been entirely unfair for DN to have suffered the adverse VAT consequences that were a natural concomitant of that contractual relationship. It will be interesting to see whether HMRC seeks leave to appeal to the Upper Tribunal.

Topics – Supply of carers to care homes – VAT exemption

Truth Recruitment Limited

The First-tier Tribunal (FTT) has released its decision in this case concerning Truth Recruitment Limited (TRL) and whether its supplies are exempt from VAT pursuant to Section 31 and Group 7, Schedule 9, VATA94.

Section 31 exempts supplies that are listed in Schedule 9.

At the relevant time Item 1, Group 7, Schedule 9 provided for: the supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following – (a) the register of medical practitioners; (c) the register kept under the Health Professions Order 2001; (d) the register of qualified nurses, midwives and nursing associates maintained under article 5 of the Nursing and Midwifery Order 2001.

Note 2 provides: paragraphs (a) to (d) of item 1 and paragraphs (a) and (b) of item 2 include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraphs where the services are wholly performed or directly supervised by a person who is so registered or enrolled.

At the relevant time Item 4, Group 7, Schedule 9 provided for: 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.

At the relevant time Item 9, Group 7, Schedule 9 provided for: the supply by (a) a charity, (b) a state-regulated private welfare institution or agency, or (c) a public body, of welfare services and of goods supplied in connection with those welfare services.

Item 10, Group 7, Schedule 9 provides in broad terms an exemption from VAT for supplies that meet various criteria including that they are ‘incidental to the provision of spiritual welfare’.

TRL is a VAT registered limited company which provides carers, including senior carers, to nursing and residential care homes. It argues that its supplies should not be subject to VAT as the care homes make exempt supplies and so it should not have to charge VAT on its supplies to them. Further, other companies supply the care homes and do not charge VAT.

In disagreement, HMRC asserts that TRL’s supplies do not fall within the exemption because: (i) the services must be carried out or directly supervised by a person registered or enrolled on the registers specified in Item 1; and (ii) no medical care is provided. HMRC’s position was also that TRL’s supplies were supplies of staff which do not fall under any of the items in Group 7.

Considering whether TRL’s supplies are exempt, the FTT noted that none of the carers were registered or enrolled in any of the professions listed in Item 1, nor did the supplies consist of services wholly performed by or directly supervised by a person registered or enrolled in any of the professions listed in Item 1.

Dismissing the appeal, the FTT agreed with HMRC that TRL’s supplies do not fall within Item 1 and therefore are not exempt from VAT. With this in mind it did not need to make any finding about whether the carers were providing ‘medical care’ for the purposes of Item 1.

The FTT also held that the exemption status of supplies does not depend on the VAT treatment of the recipient. Findings about other companies' supplies to care homes are also not relevant. TRL’s assertion of unfairness in the assessment lacked objective evidence, leading to no findings supporting this claim. Consequently, the FTT concluded that there is insufficient basis to challenge HMRC's assessment as unfair or irrational.

For further information please contact Russell Moore.

Topics – Supplies of books or ghost-writing services

Story Terrace Limited

The First-tier Tribunal (FTT) has released its decision in this case concerning ‘ghost-writing’ services and whether they qualify as zero-rated supplies of books.

A supply of goods or services is zero-rated if it meets a description in Schedule 8 VATA94.

Item 1, Group 3, Schedule 8 provides for zero-rating of books, booklets, brochures, pamphlets and leaflets. Item 7, Group 3, Schedule 8 zero-rates publications listed in Item 1 when supplied electronically.

Story Terrace Limited (STL) is a VAT registered company which specialises in transforming personal life stories into professionally written books. Inspired by the memories of his grandfather, director Mr. Bruining envisioned a service that provides tangible books, contrasting with digital formats. The company's mission was to produce one million life stories by 2028, utilising a team of experienced ghostwriters.

Customers engage through STL’s website, following an eight-step process that includes personal consultations, interviews, and collaborative writing. STL offers three packages varying in length, content, and pricing. Each package includes dedicated editorial support and culminates in the delivery of hardback books and digital copies.

STL uses proprietary software which aims to enhance efficiency by allowing customers to manage their projects, upload photos and design book covers. Ghostwriters, while crucial to the process, are not employed directly by STL.

STL argues that its supplies are within Item 1 and fall to be zero-rated i.e. it supplies books. It considers that the focal point of its supply is a book, the ‘theme’ of the terms and conditions between the consumer and STL focuses on the end result which is 4 full colour hardbacks and a digital copy of the customer’s book. In an appearance on Dragon’s Den it was clear that the dominant impression given to consumers is that STL is supplying a book and the ghost-writing element of the supply is not a means to an end and is not available separately. Further if a typical consumer was looking for ghost-writing services they would not look to STL for them because it would cost 3-6 times more to create and print a book with STL than it would to hire a freelance ghost-writer to provide the text.

HMRC, in disagreement, argues that STL makes a single supply of ghost-writing services which falls to be standard-rated. The evidence ‘in the round’, in particular the contracts, the customer reviews, the additional services offered (insofar as they also included ghost-writing) and the pricing structure shows that the ghost-writing service is the predominant element of STL’s supply. The overall tenor of STL’s website makes it clear that STL is providing a personalised package of services which includes a few copies of a printed book. STL conducts the research, writing and design which are all standard-rated services.

HMRC asserts that Item 1 precludes zero-rating of supplies which arise in consequence of the supplier providing a bespoke service. Alternatively, the supply of the ghost-writing service is the principal element of STL’s supply.

The FTT considered that this is not a case where the bespoke nature/aspect of STL’s supplies dominates such that it is able to conclude that STL makes standard-rated supplies. The contracts entered into reflect the typical consumer’s needs, that is ensuring that a book is produced to be shared and enjoyed in its physical form. That is the economic and commercial reality of the transaction, and its economic purpose.

The typical consumer would regard the provision of the book as qualitatively the most important element of STL’s supply. Therefore, in light of the contract entered into, the provision of the book is the predominant element of STL’s supply and therefore qualifies as zero-rated for VAT purposes.

The FTT recalled that HMRC had made the alternative and mutually exclusive argument that STL’s provision of books to its customers was ancillary to the provision of ghost-writing services pursuant to Card Protection Plan Ltd v Customs and Excise Commrs (Case C– 349/96). However, in light of its conclusions above it did not consider it necessary to deal with that argument.

These Regulations amend The Producer Responsibility Obligations (Packaging and Packaging Waste) Regulations 2024 (the pEPR Regulations). The pEPR Regulations impose an obligation on businesses which supply packaging or packaged goods (referred to as producers) to pay the costs of dealing with household packaging waste and of the provision of public information about the disposal of packaging waste. In doing so, they shift the costs of managing household packaging waste from taxpayers and local authorities to those businesses who use and supply the packaging (applying the 'polluter pays’ principle). They also place obligations on producers to ensure that a proportion of the packaging they supply by material type (card, glass, plastic, metal, etc) is recycled and to provide evidence of recycling to the regulator.

The amendments in these Regulations are required to enable the appointment of a producer responsibility organisation (PRO), supporting closer producer involvement in the pEPR scheme. The amendments in these Regulations also enable producers to deduct tonnage of recycled food grade plastics packaging waste from their pEPR obligations, where they have collected it directly from consumers and sent it for reprocessing in a closed loop recycling system where it is turned back into food grade recyclate. The amendments also improve the operational efficiency of the scheme and provide greater clarity to producers on where obligations sit. This includes resolving potential loopholes and removing ambiguity, improving the approach to local authority costs modelling, and removing barriers to compliance and enforcement, including updating regulator charges.

These Regulations came into force on 1st January 2026 and extend to England and Wales, Scotland and Northern Ireland and apply to England, Wales, Scotland and Northern Ireland.

For further information please contact Danny Vu.

This Brief confirms that the Extra Statutory Concession (ESC) described in paragraph 3.7 of Notice 48 is no longer needed. HMRC considers that the supplies previously eligible to be treated as single supplies under the concession should be treated as single supplies under the legislation, as confirmed by existing case law.

Paragraph 3.7 of Notice 48 – VAT on minor promotional items supplied in linked supplies schemes – provided that these are schemes in which a minor article is linked, although not necessarily physically linked, with a main article (of either goods or services) and sold with it at a single price. The price paid should normally be apportioned to reflect any difference where the items are liable to VAT at different rates.

However, the supplier may account for VAT on the minor article at the same rate as the main article, if the minor article:

  (a) is not charged to the customer at a separate price
  (b) costs the supplier no more than 20% of the total cost of the combined supply (excluding VAT), and
  (c) costs the supplier no more than:

• £1 (excluding VAT) if included with goods intended for retail sale
• £5 (excluding VAT) otherwise

This means no apportionment is necessary.

The concession will be withdrawn. Businesses should now refer to HMRC’s policy as described in VATSC11113 – Supply: Single and multiple supplies: HMRC’s approach: The general approach.

HMRC has published its latest Update for agents which includes:

• HMRC has recently published new Guidelines for Compliance – Help with Investment Zones – GfC15
• Import Control System 2
• Help your clients steer clear of tax avoidance
• Changes to HMRC sign-in screen – From 10 November 2025, customers signing into HMRC may have noticed a new sign-in screen. This new screen introduces an additional option – GOV.UK One Login, alongside the existing Government Gateway option
• Mandatory tax adviser registration: policy paper published, guidance coming soon – From May 2026, all tax advisers who interact with HMRC on behalf of clients must register and meet minimum standards
• New tool for finding HMRC manuals guidance – HMRC has published a Find HMRC manuals page which allows you to search across all HMRC manuals, filter by manuals or manual pages and sort the results, enabling you to see the latest page updates more easily

The Bank of England Monetary Policy Committee announced on 18 December 2025 that the Bank of England base rate would be reduced to 3.75% from 4.00%.

HMRC interest rates are linked to the Bank of England base rate and as a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will reduce.

Late payment interest was set at base rate plus 4% and so falls to 7.75%. The rate for interest on underpaid quarterly instalment payments falls to 6.25%.

Repayment interest is set at base rate minus 1%, with a lower limit – or ‘minimum floor’ – of 0.5% and so also falls to 2.75%. The rate for interest on overpaid quarterly instalment payments will also be 2.75%.

These changes are effective from:

• 29 December 2025 for quarterly instalment payments
• 9 January 2026 for non-quarterly instalments payments

This Guidance explains how to fill in your VAT return, using VAT accounting schemes and how to submit your return electronically. It has been updated with a replaced calculation explanation text for box 5 in section '3.6 Filling in box 5 Box' under sub header 'Box 5 net VAT to pay to HMRC or reclaim'.

This Guidance explains how to make an entry summary declaration if you move goods into GB, into Northern Ireland from GB, or into Northern Ireland from countries outside the EU. It has been updated to advise that the Import Control System (ICS) for Northern Ireland has been replaced by the Import Control System 2 (ICS2) service. This will be used for movements into Northern Ireland from 31 December 2025.

Please also refer to Make an entry summary declaration using the Import Control System 2.

This Notice made under Regulation 89(5A) of The Customs (Import Duty) (EU Exit) Regulations 2018 has been updated for conditions of authorisation that apply where declared goods are, or contain, gold.

For further information regarding Northern Ireland please contact Michael McNeil or Gerard Koevoets for global trade.

This Notice explains partial exemption and the methods and calculations to use to see how much input tax you can recover. It has been updated with the addition of further detailed guidance at section 10.2 on share sales:

10.2 Share sales

If you sell existing shares, this will normally be an exempt supply in its own right and should be treated accordingly. If you’re on a special method and the supply is incidental to your other business activity, certain costs will need to be apportioned on the basis of use. These costs are listed in Appendix 3.

If you use the standard method and the sale of existing shares is incidental to your other business activity, you should exclude the value of the share sale from your standard method calculations (see paragraph 4.8).

Input tax incurred on incidental supplies should be dealt with in the normal way, either directly attributing to the supply or included as residual tax as appropriate. You should refer to paragraph 4.9 for further information on the standard method calculation.

This tax information and impact note explains the planned exemptions, announced at Budget 2025, from Climate Change Levy (CCL) for electrolytic hydrogen and sodium bicarbonate produced from soda ash.

Amendments to the Climate Change Levy (Fuel Use and Recycling Processes) Regulations 2005 are planned for Spring 2026, subject to approval by the House of Commons.

These amendments mean the following will be treated as non-fuel uses and will be exempt from CCL:

• Electricity used in electrolysis to produce hydrogen
• Natural gas used as a source of carbon dioxide to produce sodium bicarbonate from soda ash

Colombia

The Government has issued Decree 1474, pursuant to the special powers granted under the State of Economic Emergency declared through Legislative Decree 1390 of 2025. The new decree introduces temporary tax measures that will be effective throughout 2026. Indirect tax measures include:

• Online gambling will be subject to a 19% VAT rate in 2026, calculated on gross gaming revenues (i.e., total bets minus prizes paid). Until 31 December 2025, VAT was determined based on deposits made into the gambler's account with the operator
• Liquor, wine and similar products will be subject to a 19% VAT in 2026 (previously 5%). Additionally, these products will incur excise taxes as follows: (i) 750 Colombian pesos (COP750) for each degree of alcohol in a 750-cc container, or proportionally, plus (ii) 30% ad valorem tax based on the final consumer price
• Cigarettes and manufactured tobacco will be subject to excise tax as follows: (i) a specific element of COP11,200 per box of 20 units (or proportionally) or COP891 per gram of chopped tobacco or similar, plus (ii) 10% of the final consumer price (for chopped tobacco or similar the 10% applies to the specific element mentioned in (i) above). For derivatives and substitutes for cigarettes, the excise tax will apply as follows: (i) 30% of the retail price, plus (ii) COP2,000 per millilitre
• The VAT exemption for courier and urgent shipments is reduced to those not exceeding US$50 (previously US$200)
• The consumption tax on certain goods is increased: (i) from 8% to 19% for motorcycles with cylinder capacity exceeding 200 cc, yachts and other vessels for pleasure or sports, and (ii) from 16% to 19% for certain vehicles and pick-up trucks with free-on-board (FOB) value equal to or greater than US$30,000, as well as certain aircraft, including planes and helicopters
• The 1% tax on the first sale or export of hydrocarbons or coal classified under tariff headings 27.01 and 27.09, originally established in 2025 under temporary measures adopted during the State of Internal Unrest, is extended through 2026
• To accelerate the resolution of existing tax, customs and foreign exchange disputes and enhance collection, while also offering incentives to taxpayers, several measures have been introduced

Italy

The 2026 Budget Law introduces updates to indirect taxation. Our alert summarises the key measures which include:

• Changes to the VAT taxable base for barter transactions
• New administrative levy on small shipments
• Automatic VAT settlement in the event of failure to submit annual VAT return
• Postponement of the entry into force of the plastic-tax and the sugar-tax
• New consolidated VAT code

Multinational businesses should review their internal procedures and comply with the new regulations. Furthermore, taxpayers operating with an Italian VAT number should update VAT code descriptions in their ERP systems and invoices to reflect the latest references reported in the new consolidated VAT code.

Italy

Parliament has approved the 2026 Budget Law (2026 BL), which introduces significant tax measures for banks, other financial intermediaries and insurance companies. Indirect tax measures include amendments to Insurance Premium Tax (IPT) – from 1 January 2026, the IPT law is amended such that drivers' injury protection and roadside assistance will be subject to the 12.5% IPT rate, regardless of whether these risks are shown separately within the relevant policy.

Additionally, from 1 January 2026, the updated IPT Tariff specifies that the 12.5% rate applies to insurance for vehicle or boat-related risks, including accidental damage and similar risks, theft and robbery, fire damage and similar risks, legal expenses and glass coverage.

The 2026 BL also introduced an exceptional IPT payment arrangement for 2026 allowing insurance companies to postpone until 30 June 2026 the payment of IPT on driver's injury protection and roadside assistance premiums collected during the first five months of 2026 (January through May).

Lastly, insurance companies must provide policyholders with a reduction equal to at least two-thirds of the higher IPT resulting from change applicable starting from 1 January 2026.

Italy

In tax audit activity focused on financial intermediaries, the Italian Tax Authorities (ITA) have focused, beginning mid-2025, on assessing the VAT treatment of year-end transfer pricing (TP) adjustments, questioning whether such adjustments qualify as "consideration for VAT purposes".

Recent ITA rulings and audit practice distinguish TP adjustments contractually linked to specific supplies – which may affect the VAT taxable base – from adjustments made solely to align margins, which the ITA have generally deemed outside the scope of VAT.

According to recent rulings, to be within the scope of VAT, TP adjustments must (1) constitute consideration, (2) relate to identifiable transactions and (3) have direct documentation linking them to original supplies of goods or services.

A recent CJEU decision confirms that remuneration between affiliates can be subject to VAT if linked to specific services, and tax authorities can ask for additional documentation beyond invoices to verify the existence of services, as long as this requirement is necessary and reasonable.

Financial organisations and, more generally, multinational groups should review agreements and documentation, align processes for correct VAT treatment and consider advance engagement with tax authorities to help mitigate VAT compliance risks.

EU

The European Commission has published a comprehensive package of provisional documents to define the definitive Carbon Border Adjustment Mechanism (CBAM) regime of the EU starting January 2026. The release includes 11 legislative acts, comprising implementing and delegated regulations, proposals and amendments and 13 supplementary documents such as technical annexes, impact assessments and supporting materials.

Also, a subset of 8 (out of the 11) legal acts has been published. The remaining acts should follow. These publications provide the legal, technical and procedural framework for the CBAM's next phase. The documents address calculation methodologies for embedded emissions, customs and registry processes, verification and accreditation standards, certificate pricing and the extension of the CBAM's scope to additional goods and anti-circumvention measures.

Together, these materials set out the requirements and processes that manufacturers outside the EU, importers (authorised declarants) and other stakeholders, like accredited verifiers, must follow to comply with the CBAM from 2026 onward.

Canada

The Minister of Finance and National Revenue has announced various measures to support the Canadian steel industry.

Effective 26 December 2025, Canada has further reduced the tariff-rate quota (TRQ) levels for certain imports of steel products from non-free trade agreement partners, as well as for certain imports from countries with which Canada has a free trade agreement (excluding Mexico and the United States).

Canada has also imposed a 25% global tariff on certain imported steel derivative products effective 26 December 2025. This measure applies to various categories of derivatives for which steel content is a large portion of the product's full value.

Finally, Canada will end the temporary remission of counter-tariffs on certain steel imports from the US that are used in Canada for manufacturing, processing, food and beverage packaging or agricultural production, applicable to imports occurring after 31 January 2026. The temporary remission of counter-tariffs on aluminium imports from the US and used in the same applications will end on 30 June 2026. In addition, the remission period has been extended to 30 June 2026 for certain imported goods to support Canadian businesses as they adjust their supply chains to switch from imported sources to domestic supplies.

Saudi Arabia

The Tax and Customs Authority (ZATCA) has announced the Minister of Finance's decision to further extend for six months the Cancellation of Fines and Exemption of Financial Penalties initiative for taxpayers subject to all tax laws, until 30 June 2026. The amnesty is effective from the date of the announcement.

The initiative, previously extended until 31 December 2025, has now been extended for another six months to continue to provide relief to taxpayers and businesses that meet the qualifying requirements. The ZATCA has published a Simplified Guide – Cancellation of Fines and Exemption of Financial Penalties to help taxpayers understand the details of the initiative.

Türkiye

On 25 December 2025, Presidential Decision No. 10767 was published in the Official Gazette, reducing the Digital Services Tax rate from 7.5% to 5% as of 1 January 2026, and further to 2.5% as of 1 January 2027.

Türkiye

Presidential Decree No. 10813 introduces significant changes to the customs process for business-to-consumer (B2C) e-commerce shipments, effective from 6 February 2026.

Postal administrations and authorised delivery operators can no longer file simplified customs declarations for imports valued at €30 or less, requiring all shipments to comply with regular customs declaration procedures regardless of value.

For products valued up to €1500 that are not of commercial quantity, a regular customs declaration must be submitted, necessitating the declaration of all applicable import duties and obtaining requisite permissions or licenses.

Those engaged in B2C e-commerce should prepare for these changes by reviewing their import processes and ensuring compliance with the new customs declaration requirements to avoid potential delays and increased costs.

The Commission has reported measures which aim to close loopholes to prevent circumvention and strengthen the efficacy of the EU's Carbon Border Adjustment Mechanism's (CBAM), in response to feedback received from industry.

Starting January 1, 2028, the CBAM's scope will expand to include specific steel and aluminium-intensive downstream products, while closing loopholes to prevent circumvention.

Answering the call of the sector, a temporary support scheme is being introduced to protect EU producers vulnerable to carbon leakage, rewarding cleaner companies globally and fostering a fair, competitive environment.

The proposals also take into account concerns raised by trusted international partners, which will benefit from some simplifications and flexibilities. It introduces the concept of equivalence in carbon tax and price deduction and includes a new clause allowing for negotiated trade facilitation measures, such as mutual recognition of trustworthy accreditation bodies, and new facilities on equivalence of carbon price deduction.

This aims to further strengthen the CBAM's role in promoting decarbonisation beyond EU borders, facilitated by outreach and technical aid, which is confirmed in the CBAM Review report, unveiled on 17 December.

Please also refer to Questions and Answers on the Carbon Border Adjustment Mechanism (CBAM).

For further information please contact Danny Vu or Mark Feldman.

The OECD has published a report which examines the design and operation aspects of digital continuous transactional reporting (DCTR) regimes for VAT. It has been prepared in the context of a growing number of jurisdictions worldwide that have adopted or are considering the introduction of such regimes. DCTR typically requires the (near) real-time reporting of invoices or transactional data to tax authorities, most often with the objective of strengthening VAT compliance and risk management.

The rapid global expansion of DCTR regimes has, however, taken place in a largely uncoordinated manner. This has led to significant heterogeneity across jurisdictions, resulting in increasingly complex compliance challenges, particularly for businesses engaged in cross-border trade.

In response, this report offers guidance to support jurisdictions in the design and operation of DCTR regimes, with a view to facilitating compliance and administration while promoting greater international consistency. It addresses six key areas:

• Strategic approaches to introducing DCTR
• Digital invoicing as the foundation of DCTR
• Measures to support business compliance
• Information security
• Interoperability
• The long-term sustainability of DCTR regimes

The report is intended for consideration by interested jurisdictions and should not be interpreted as recommending the adoption of a DCTR regime, which remains the sovereign decision of each jurisdiction.

For further information please contact Chris Taylor, Emmie Nygard, Chiu Ming Man (FS), Adam Broughton, Simon Swanson or Sarah Delaney.