VAT Update – January 2026

HMRC has published Revenue & Customs Brief 9, which is concerned with the VAT liability of temporary medical staff.

This follows the First-tier Tax Tribunal decision in Isle of Wight NHS Trust v HMRC [2025] UKFTT 1114 (TC).

This case concerned the VAT exemption which applies to the provision of a deputy for a person registered in the register of medical practitioners. HMRC’s view had been that the exemption would only narrowly apply to certain deputising services and not to a supply of staff. The FTT disagreed and concluded the exemption applies to supplies of locum doctors, including those by employment businesses.

HMRC is inviting claims for overpaid output tax, where services qualifying for VAT exemption, following Isle of Wight, supplied in the last four years have been supplied with VAT charged. Any such claims would need to reflect a corresponding input tax position, given VAT may have also been overclaimed, on account of costs being treated as attributable to taxable supplies rather than exempt supplies.

Comments

HMRC’s change of view, and the decision not to appeal Isle of Wight, will be of interest to suppliers of locum doctors who should consider their position, and where applicable correct the VAT treatment going back four years. The quantum of the adjustment would need to include amendments to input tax recovery. RCB 9 indicates HMRC will consider unjust enrichment when processing claims, and if the claimant is not able to demonstrate that it has borne the economic burden of the VAT, HMRC may reject them.

Suppliers of temporary medical staff (principally locum doctors) should take advice on next steps.

Please contact Nick Hart, VAT Partner, for further information, if you’re impacted by the changes described.

In a recent decision, WM Morrison Supermarkets Limited [2025] UKFTT 1542 (TC), the First-tier Tax Tribunal (FTT) dismissed Morrison Supermarkets Limited’s (Morrisons) appeal against VAT assessments issued by HMRC for under-declared output VAT totalling £17 million for the VAT periods from January 2017 to July 2020. HMRC issued these assessments on the basis that Morrisons sales of whole ‘cool-down’ rotisserie chickens (‘CDRCs’) were hot food and were excluded from the zero rate of VAT which applies to many food items, as a ‘supply in the course of catering’ which is a standard rate supply.

The product in question is a whole chicken which is cooked on site within a Morrisons retail outlet and then placed onto unheated racks for customers to eat or take home and refrigerate. The Tribunal had to consider whether CDRCs fall under the definition of hot food for VAT purposes under Note 3B, Group 1, Schedule 8 of the VAT Act 1994.

The appellant argued that the supplies of CDRCs were zero rated for VAT under Section 30 and Item 1, Group 1, Schedule 8 in the VAT Act 1994 as ‘food for a kind used for human consumption’, and these supplies did not fall within the exclusion for supplies made ‘in the course of catering’. Secondly, Morrisons argued that HMRC’s previous acceptance of CDRCs being zero rated for VAT gave rise to a legitimate expectation that it was applying the correct VAT treatment.

On the first point the FTT considered the conditions set out in Note 3B to identify whether CDRCs were considered hot food (ie standard rated for VAT). The FTT found that CDRCs were required to be eaten within two hours or refrigerated, the CDRCs were kept hot until sold as the paper bag in which they were stored, retained heat. Consequently, the FTT found that the CDRCs were excluded from the zero rating and were subject to VAT at the standard rate, as a supply in the course of catering.

With respect to the legitimate expectation ground, the FTT held that HMRC had not given clear, unambiguous, and unqualified rulings to the appellant previously, and that Morrisons had not made full disclosure of all material facts, particularly regarding the packaging and sale process. . The legitimate expectation argument also failed on that basis.

Comments

Following on from the FTT’s findings, the FTT conclusively dismissed Morrisons appeal against HMRC’s decision to assess for under-declared output VAT of £17 million.

Suppliers of hot food are recommended to review their position as this decision confirms that hot food will be standard rated if it’s kept hot after heating or provided in packaging that retains heat, regardless of the supplier’s intention or customer consumption habits.

For further details, please contact Nick Hart, VAT Partner.

The First-tier Tribunal’s recent decision in Littlewoods Limited v The Commissioners for HMRC [2025] UKFTT 1602 (TC) concerns whether VAT  incurred on product-specific photography that is used in catalogues and online stores can be fully recovered, or whether it must be apportioned between taxable and exempt supplies, in the case the costs are incurred in a partially exempt VAT group.

Littlewoods Limited, as the representative member of a VAT group, operates well-known online retail stores under a number of brands. The group also supplies financial and insurance related products to which VAT exemption is applied.

HMRC had denied more than £2 million in VAT recovery on the basis the costs of producing product-specific photographs for the e-retail sites were not solely attributable to taxable supplies and therefore recovery should be restricted in line with the VAT group’s partial exemption position.

The court noted the following:

• Product-specific photographs are used to display goods online and in catalogues, serving as a substitute for physical inspection.
• The majority of product images are now provided by suppliers at no cost; Littlewoods produces images only for own-brand products or where suppliers do not provide them.
• The photographs themselves do not reference or promote financial services; information about credit and insurance is displayed separately, albeit often on the same page.
• The business model is predicated on offering flexible payment options, but most transactions are on non-interest-bearing terms.

The appellant argued that the costs in question were incurred solely for the purpose of displaying products for sale (taxable supplies) and that the photographs were not used to promote financial or insurance services.

HMRC contended that the integrated nature of the business meant that marketing, including product photography, promoted both goods and credit, and that the costs should therefore be apportioned.

The Tribunal applied the ‘direct and immediate link’ test and concluded:

• The photographs are used exclusively to display retail consumer products for sale (clothes, household goods etc).
• The proximity of credit and insurance information on the applicable websites does not convert the photographs’ use into a mixed purpose.
• The costs of producing the photographs are not directly and immediately linked to exempt supplies of credit or insurance.
• The integration of retail and finance within the business model is not sufficient to require apportionment of input tax.

The appeal was allowed.

Comments

The court arrived at what appears to be the correct decision here in allowing full VAT recovery on the costs of photographs. Whilst it may not always be the case that marketing expenditure can be solely attributed to specific types of supply being made, the court was satisfied here that the cost of the product photographs could be considered as such, any link to financial or insurance services was indirect at best.

Attribution of costs for the purposes of VAT recovery remains a complex area at times and is often a matter that is considered in the courts. The recent Supreme Court judgement in Hotel La Tour (see here) is a case in point, and it highlights how the view of the taxpayer and that of HMRC, and indeed the courts, can often not align. It remains a point which is key to the principles of VAT recovery is therefore not to be overlooked particularly for businesses which make both taxable and exempt supplies.

For further details, please contact Nick Hart, VAT Partner.

In D Nuttall UK Limited v The Commissioners for His Majesty’s Revenue and Customs, [2025] UKFTT 01600 (TC), the FTT has found in favour of the appellant in a case where the economic/commercial reality of an arrangement did not align with the contractual position, and the court favoured the former when concluding on whether the appellant was entitled to reclaim VAT on fuel and repair costs associated with trucks that were owned by another party, ROBO. The trucks were used by the appellant to supply delivery/transport services to its customers. HMRC had assessed the appellant for incorrectly (in their view) claimed VAT.

HMRC made the argument that ROBO was a subcontractor of D Nuttall UK Limited, providing transport services to it, and it followed the cost of fuelling and maintaining the ROBO owned trucks, were proper to ROBO and not D Nuttall UK Limited. This was supported by the contractual arrangements. However, the FTT identified and agreed that the economic and commercial reality of the arrangements did not align with the contractual position.

The FTT considered the economic reality reflected that ROBO made its trucks available to the appellant who then used them as though it did own them – controlling all aspects of their operation, bearing costs in the process and utilising them to make supplies to its customers.

The FTT upheld the appellant’s appeal on this basis.

Comments

An interesting case and one which highlights how complications can arise where the commercial reality of a supply does not reflect the underlying contractual position. In such instances the courts will typically apply the commercial reality, whilst HMRC here have applied the position which the underlying contracts suggest is correct.

Arrangements in which the contractual and commercial positions are not aligned are open to challenge in terms of how they are being interpreted and how VAT is being applied. Ensuring consistency across both positions, ensures there is little scope for ambiguity in the resulting VAT treatment.

In its summing up, the court remarked of the appellant’s fortune here that the tribunal had accepted the commercial reality, as it supported the VAT recovery position that the business had reported.

For further details, please contact Nick Hart, VAT Partner.

HMRC have recently published Revenue and Customs Brief 8, outlining the changes for Private Hire Vehicle Operators (PHVO) which came into effect on 2 January 2026. The policy change has been introduced following the recent First-tier Tribunal and Upper Tribunal decisions for Bolt Services Limited v HMRC (Saffery VAT Update – April 2025).

The policy change was announced in the Autumn 2025 Budget and aims to provide clarity to PHVOs with respect to the VAT treatment of supplies of private hire and taxi journeys.

Historically, the supply of private hire vehicle and taxi services have been subject to VAT where the services are treated as supplies made by the driver to the passenger, with the PHVO providing agency services for facilitating the booking of the ride. For VAT purposes, the PHVO would account for VAT on their agency service and on the full fare for account work where they acted as a principle.

Following a number of recent non-VAT court rulings where it was found that PHVOs operating in London were required to act as principle for the supply of journeys, and operators outside of London could continue to operate as agents or principles for non-account journeys, a number of PHVOs started using the Tour Operators Margin Scheme (TOMS) to account for VAT. Where the PVHO acts at the principle, the full fare would be subject to VAT. However, under TOMS, VAT is accounted for only on the margin of the journey, after paying the drivers for their service, rather than on the full fare.

HMRC’s view remained that PHVOs were not within the scope of TOMS, and that the TOMS scheme was not designed or intended for domestic supplies by PHVOs, rather for supplies of travel services in the EU and overseas (such as package holidays).

This led to an appeal to the FTT by Bolt Services Limited, which ruled that the private hire vehicle supplies made by Bolt could fall within the scope of TOMS. The decision was upheld by the Upper Tribunal. HMRC has appealed this decision, to the Court of Appeal.

In order to provide certainty to operators, the UK government announced that it would introduce legislation which would exclude private hire and taxi journeys from the VAT TOMS, except where journeys are supplied in conjunction with certain other travel services.

Comments

The government’s reaction to the Upper Tribunal decision in Bolt has been to bring about a change in legislation to specifically exclude PHVOs from TOMS. When the measure was first announced at the 2025 Budget, an immediate concern was that passengers would face higher fares as PHVOs were expected to amend pricing models as a result of not being able to use TOMS. Whilst it remains to be seen if that will be the case, it’s interesting to note that certain PHVOs have already reacted by amending the contracting relationship between themselves and the drivers, reverting back to an agent model where other regulatory circumstances allow them to do so. We expect HMRC to scrutinise those amended arrangements closely.

For further details, please contact Nick Hart, VAT Partner.

The First-tier Tribunal (FTT) in Story Terrace Limited v The Commissioners for HMRC – Find Case Law – The National Archives recently considered the VAT treatment of supplies made by Story Terrace Limited, a publishing company specialising in the production of bespoke autobiographical books. Story Terrace treated its supplies as that of selling books and applied the zero rate of VAT accordingly. HMRC’s view was that the supplies constituted standard-rated ghost-writing services.

The scope of Story Terrace’s contracted services was notably specialised and detailed. These services included matching writers with customers, conducting in-depth interviews, drafting and editing manuscripts, and designing the book layout. Upon completion, customers received a professionally bound physical hardback book, together with a digital version.

HMRC argued the predominant element of the supply was a personalised ghost-writing service, which would ordinarily attract VAT at the standard rate. HMRC further maintained that the provision of a printed book did not, of itself, justify zero-rating where creative and editorial services were the main elements of the supply for VAT purposes.

In considering the correct VAT treatment, the Tribunal applied a predominance test, assessing the economic and commercial reality of the supply from the perspective of a typical consumer. The FTT concluded that both the customer’s expectations and the contractual purpose of the arrangement were the receipt and provision of a physical book. Although the interviewing, writing, and design processes were essential, the court viewed these activities as intermediate steps undertaken to deliver the final product. The book itself was the predominant element of the supply, in the view of the court, with the conclusion being the appellant was correct in applying the zero rate of VAT to the supplies.

Comments

In applying the correct rate of VAT to a supply, it’s necessary to have considered the nature of the supply, and in cases where more than one element or component is present, whether there is a single supply or a number of different supplies. In the case a single supply is identified, it’s necessary to consider the overall nature of that supply, and what if any, is the predominant element. There is a large body of VAT case law which deals with these principles. Regularly central to this is consideration of what the customer’s perception is and what they consider it is that they are purchasing. This was an important element of the Story Terrace case, and is also at the heart of many determinations of correct VAT treatment to apply to specific transactions.

For further details, please contact Nick Hart, VAT Partner.