Key VAT updates for October 2026

Our monthly VAT Update highlights several notable developments, including VAT Assist, a new tool to be launched by HMRC to aid taxpayer compliance. We lead readers to our recent article on sub-contracting fund manager services, and we put the spotlight on the temporary zero-rate of VAT being applied to certain supplies of electricity until 31 March 2027. Finally, our regular feature Is it food? returns to report on a case regarding collagen-based drinks.

A note from Nick Hart, VAT Partner

It feels a little like a calm before the storm currently, with the Budget only a couple of weeks away now. Will we see any significant VAT changes? Whilst an increase to the standard rate would seem unlikely given that would be a manifesto breaker for the government, an increase to the VAT registration threshold may be announced.

Other areas where we might see some changes is the rate which applies to electric vehicle public charging, and potentially the temporary zero-rate on the installation of energy-savings materials being extended beyond 31 March 2027 or even made permanent. We are also hoping for further information on electronic invoicing and potentially other measures which may seek to improve VAT administration. Whatever is announced, the Saffery team is ready to summarise any changes and shares its insights into the implications for business. Register here for our annual Budget webinar.

HMRC’s new VAT Assist service: what businesses should know

HMRC has recently published further information about VAT Assist, a new service due to be introduced from April 2027. The service will compare VAT return figures submitted through compatible software against information already held by HMRC and provide real-time feedback where potential errors or anomalies are identified.

Where a discrepancy is detected, HMRC intends to provide a ‘digital nudge’ before a VAT return is submitted, explaining the issue in plain English and, where relevant, directing users to HMRC guidance. Importantly, businesses will remain responsible for deciding whether their VAT return is correct and will still be able to submit returns without making any amendments.

Whilst the service is being presented as a tool to help taxpayers avoid mistakes in their VAT returns, it also represents a further step towards HMRC using increasingly sophisticated data analysis and technology within the VAT compliance process. Businesses should expect HMRC to compare information received from multiple sources more extensively and to identify and notify unusual VAT return positions more quickly than has traditionally been the case.

For many businesses, VAT Assist may provide a useful early warning where figures have been entered incorrectly or where data does not align with HMRC’s expectations. However, a warning from the system will not necessarily mean that a VAT return is incorrect. Businesses with complex VAT positions, unusual transactions, seasonal fluctuations, or legitimate one-off adjustments may still receive prompts and should ensure they maintain appropriate records to support their treatment.

Although VAT Assist will not go live until April 2027, businesses should use the lead time to review the quality of their VAT data and ensure they have robust processes and documentation in place. Strong record keeping and clear audit trails are likely to become increasingly important as HMRC continues to expand its use of automated compliance tools.

Comments

Whilst VAT Assist may help reduce simple filing errors, it is also likely to increase HMRC’s visibility of unusual VAT return positions. Businesses undertaking significant transactions, operating partial exemption methods, making international supplies, or applying complex VAT treatments should ensure that the rationale for their approach is properly documented and can be evidenced if challenged.

It will also be interesting to see how HMRC views the interaction between VAT Assist and the VAT error penalty regime. Where a business receives a digital nudge highlighting a potential issue but proceeds to file without investigating or retaining evidence to support its position, HMRC may seek to argue that this is relevant when assessing whether reasonable care has been taken or not, and subsequently the level of any penalties arising from any error. Whilst taxpayers will not be obliged to follow VAT Assist’s recommendations, businesses should carefully consider and document the reasons for disregarding any warnings, particularly where the matter could result in an under-declaration of VAT. We expect adoption to be voluntary so how will HMRC view non-take up from a reasonable care and penalties perspective? It’s an interesting question but we suggest businesses should take every opportunity available to  ensure its VAT filings are accurate.

With HMRC continuing to invest in real-time compliance monitoring and data analytics, now is a good opportunity for businesses to review their VAT governance and controls. If you would like to discuss the potential implications of VAT Assist, assess the robustness of your VAT reporting processes, or obtain advice on complex VAT treatments, please do get in touch with Nick to discuss.

Zero-rate for domestic electricity supplies from 1 October 2026

Earlier this year the government announced that the VAT rate on domestic electricity supplies in Great Britain would be reduced from 5% to 0% from 1 October 2026. The necessary legislation has now been enacted. Qualifying supplies of electricity in Northern Ireland will continue to be subject to VAT at the reduced rate of 5%.

HMRC has published Revenue and Customs Brief 10 (2026), a Tax Information and Impact Note and updated Fuel and power (VAT Notice 701/19). The guidance confirms that the relief applies from 1 October 2026 to 31 March 2027 and to the same supplies that would otherwise qualify for the reduced rate. It also includes information on determining the VAT treatment of supplies spanning 1 October 2026.

Comments

This measure, which is currently a temporary one, will be of interest to those who typically supply electricity at the reduced rate, and to those who receive the benefit of that.

Domestic electricity and electricity used by charities for qualifying non-business purposes will in particular benefit from 0% VAT until 31 March 2027. Businesses who now need to apply 0% VAT to qualifying supplies, include residential landlords who charge tenants for electricity where separate meters are being used. If you are a residential landlord in this situation you would need to be mindful of the temporary zero-rate to ensure your tenants are receiving the benefit of this measure. The VAT treatment of charges from landlords to tenants can be a complex one and the VAT team at Saffery is working closely with residential landlords to ensure the correct VAT treatment is being applied.

HMRC’s Guideline for Compliance on Fund Management services

HMRC has published Guidelines for Compliance (GfC) 20: Help with VAT on fund management services. HMRC says that GfC 20 is “designed to help businesses determine the correct VAT treatment of outsourced fund management services, including whether services should be treated as single or multiple supplies”.

Our article on the topic provides further insight.

Please get in touch if you are a supplier of outsourcing fund management services, or a fund manager receiving outsourced supplies, as there may be a VAT position to correct.

Is it food?

This month’s food insight examines the VAT treatment of collagen-based drinks.

In Minerva Research Labs Ltd v HMRC [2026] UKFTT 1320 (TC), the First-tier Tribunal considered whether Minerva’s collagen-based drinks qualified for VAT zero-rating as ‘food of a kind used for human consumption’. Minerva had originally treated the products as standard-rated but later submitted an error correction claim seeking repayment of £3.64 million. HMRC rejected the claim, leading to the appeal.

It was common ground between the parties that the products were not excluded from zero-rating as beverages, as they are not consumed ‘to increase bodily liquid levels, to slake thirst, to fortify or to give pleasure’ (these being key elements of the test typically applied by HMRC and the courts when considering whether a product is a beverage or not). The key issue was therefore whether the products would be regarded by the ordinary customer, as food.

The products consisted of collagen-based liquid supplements marketed to improve skin, hair, joint health and anti-ageing outcomes. Although the Tribunal accepted that the drinks contained nutritional ingredients such as proteins, vitamins and minerals, it concluded that the nutritional value alone was not enough to classify the product as food for VAT purposes.

The Tribunal found that customers purchased the products primarily for the perceived beauty and wellness benefits rather than for nourishment. The products were marketed as ‘doses’ and ‘treatments’ and were not promoted as replacements for meals or snacks. As a result, the Tribunal held that the drinks could not be classified as food. The appeal was therefore dismissed, and the products remained subject to the standard rate of VAT.

Comments 

This case highlights that the courts will look beyond a product’s ingredients and nutritional content when determining VAT liability and place significant weight on how the product is marketed to customers and the reasons why customers purchase them.

The case also demonstrates the continued uncertainty around the VAT treatment of emerging and evolving trends in health and wellness products. Applying VAT legislation drafted decades ago can be difficult and disputes arise over where the boundary between food and supplements should be drawn.

Please get in touch if you are selling a similar product and applying the zero-rate of VAT.

Reader Q&A

“As part of VAT Assist will HMRC have direct visibility into our accounting and the transactions which are being reported on the VAT returns?”

Nick Hart, VAT Partner:

“Whilst VAT Assist will be another way in which HMRC is seeking to modernise VAT compliance through technology, it is not a gateway into transactional data which HMRC will have direct and immediate sight of. With the advent of electronic invoicing in the UK however, there does appear to be a shift towards real-time or near real-time transactional reporting to HMRC. We are some way off that becoming a reality, but it is a consideration for government.”

Submit your question for October’s VAT Update

If you have a VAT question you would like our team to consider in the next edition, please send it to us using the submission form or get in touch.

How Saffery can help

Thank you for reading this month’s update. We share these insights each month to help you stay ahead of developments that could shape your compliance, planning and day-to-day business operations.

If you’d like support with any aspect of your VAT position, or would like Nick and the team to answer your question in the next edition, please use the submission form or get in touch to arrange a conversation.