VAT Update – October 2025

We previously reported on the Court of Appeal case involving Prudential Assurance Company Limited (‘Prudential’) in our April 2024 VAT Update. In The Prudential Assurance Company Ltd UKSC/2024/0065, the UK Supreme Court upheld the Court of Appeal’s decision to dismiss Prudential’s appeal. It concluded that VAT is accountable on a payment for a continuous supply of services if the time of supply falls after the supplier has left the VAT group, despite the services being performed whilst that supplier, and Prudential, were still a member of the VAT group.

The time of supply (the point at which VAT is required to be brought to account) with respect to a continuous supply of services is the earlier of payment date or the issuance of a VAT invoice. Silverfleet Capital Limited (‘Silverfleet’) provided investment management services to Prudential, which were continuous in nature, provided over a period of time and on a reoccurring basis with VAT invoices being issued, and fees payable, only upon the achievement of specified fund value milestones, ie akin to a success fee basis.

Both companies were members of the same VAT group at the time the services were carried out, but Silverfleet exited the group when it no-longer met the common control condition, following a management buy-out. Silverfleet subsequently raised VAT invoice(s) to Prudential for the investment management services, several years after undertaking the performance of the services. VAT was originally charged.

Prudential queried the addition of VAT and made a non-statutory clearance application to HMRC.

HMRC considered the time of supply to be after the companies were no longer members of the same VAT group.

Following the earlier dismissals by the Upper Tribunal and the Court of Appeal, the Supreme Court further upheld these decisions. The underlying technical point was whether the VAT grouping provisions take precedent over the time of supply rules which apply to continuous supplies of services. The Supreme Court concluded they do not.

Comments

An important case which highlights that the intra-VAT group disregard does not supersede the time of supply rules, and here the time of supply was determined to be in accordance with Regulation 90 (1995 VAT Regulations) which concerns continuous supplies of services (in this case investment management services supplied over a period of time. The point at which the supply took place for VAT purposes was not when the services were being provided (and therefore did not take place when the two companies were in the same VAT group) but the earlier of the issuance of a VAT invoice or receipt of payment.

The issue for Prudential is that the VAT it incurred would not have been recoverable for it, so the loss of the appeal results in a significant VAT cost.

Intra-group supplies should not be overlooked for VAT purposes, and issues arise as a result of specific time of supply rules applying, and changes in the VAT group occurring, particularly where the recipient of a supply is not able to fully reclaim VAT it pays on its costs.

For further information please contact Nick Hart, VAT Partner.

The VAT team at Saffery have been following the Hippodrome Casino case since the First-tier Tax Tribunal decision in April 2022. The last time we commented when the Upper Tax Tribunal passed down its judgement. Now the Court of Appeal has rejected the appellant’s appeal and has agreed with HMRC’s position, in Hippodrome Casino Ltd [2025] EWCA Civ 1259.

The case is concerned with partial exemption and the recovery of residual input tax by Hippodrome Casino Limited (‘HCL’). Residual input tax is VAT on costs incurred which are overhead costs of the business or are costs which are used for making both taxable and exempt supplies. HCL has maintained throughout that the standard method of partial exemption (which is an outputs-based method) does not provide a fair and reasonable VAT recovery position. HCL had failed to present an alternative methodology, to HMRC, in which the use of costs was more accurate than the standard method.

HCL had proposed a floorspace based apportionment method, based on the floorspace used for gambling activities (which are VAT exempt) and the floorspace used for taxable hospitality and entertainment services (which are taxable for VAT purposes). HMRC rejected this methodology on the basis it was not a fair and reasonable reflection of actual use of VAT-bearing costs.

HCL appealed the decision of the UT, on four grounds including that the UT had not given sufficient regard to data which supported, according to HCL, that approximately 30% of the customers visited the casino for hospitality and entertainment and not to gamble.

The Court of Appeal has rejected the appeal, concluding the standard method applies as HCL has not presented an alternative which provides a fairer and more reasonable outcome.

Comments

This case will be of interest to those who rely on a floor-based apportionment method, whether that be for partial exemption purposes or calculating a business/non-business VAT recovery split, and also to those currently considering adopting a new method based on area. Whilst HMRC do accept floor-based methods in many circumstances, in the case of HCL they did not accept that such a method was appropriate in the case of a casino business, and ultimately the courts have agreed.

Floor-based methods will often provide the basis for a fair and reasonable VAT recovery position, it is not necessarily appropriate in all cases, and it is important to test a method based on area against a comparative method based on different parameters. The key is the fair and reasonable test, and whether the method is an appropriate estimation of how costs are used within a partially exempt business.

Remember, a partial exemption which deviates from the standard method, is by default a special method and approval from HMRC to use that method must be obtained in advance of adopting it.

If you would like to discuss the HCL case in more detail or if you have any concerns regarding the VAT recovery method you use or are intending to use, please do get in touch with Nick Hart, VAT Partner.

In a recent decision, Telamara Limited [2025] UKFTT 1123 (TC), the First-tier Tax Tribunal (FTT) dismissed Telamara Limited’s appeal against VAT assessments issued by HMRC, concluding that a supply of nitrous oxide for culinary use is subject to the standard rate of VAT.

The FTT found that nitrous oxide was not food of a kind for human consumption, even when being used for culinary purposes. For this reason, it is not a product which is eligible to be zero-rated under the VAT relief which applies to many food items.

Telamara supplies cylinders of nitrous oxide (N2O) to wholesalers as well as catering companies. These companies typically use the nitrous oxide to infuse with other ingredients to make several items including whipping cream. Telamara considered that these supplies should qualify for the VAT zero rate, because the product was used for culinary use as food for a kind of human consumption. They also contended it is comparable to bicarbonate of soda which was found to be zero rated for VAT in Phoenix Foods Ltd v HMRC .

HMRC disagreed and had concluded the product is standard rated. HMRC issued Telamara assessments for the under-declared VAT of approximately £1.48 million.

The FTT agreed with HMRC – nitrous oxide is not food and therefore not subject to the zero rate of VAT. The gas has no nutritional content in the form of fat, protein, carbohydrate, fibre or sugar and did not add any calorific value. In addition, since nitrous oxide is a food additive (E number E942), by definition, it is not a food ingredient and is not normally consumed as food. The addition of the product did not change the food itself as it only changes the texture of the food.

Comments

The FTT conclusively dismissed Telamara’s appeal against HMRC’s decision to assess for under-declared VAT.

Suppliers of food additives are encouraged to review their position if they are also supplying products which do not add any nutritional or calorific value to food.

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

Hotelbeds UK Ltd (“Hotelbeds”), a wholesale travel provider, has successfully won the right, through a High Court judgement, Hotelbeds UK Limited v Commissioners for HMRC [2025] EWHC 2312, to judicial review with respect to a decision by HMRC through a judicial review. The matter concerns recovery of input tax without a VAT invoice, using alternative evidence to support the position.

Hotelbeds operates by purchasing UK hotel rooms for the purpose of reselling them to travel intermediaries. The purchase of hotel rooms by Hotelbeds are typically settled using virtual credit cards, a method that often results in suppliers not issuing VAT invoices which Hotelbeds would typically need to support its VAT recovery position.

To recover input tax on these purchases, Hotelbeds submitted four Error Correction Notices to HMRC, providing alternative forms of evidence by way of transaction logs, supplier VAT numbers, and payment records. HMRC accepted the first two Error Correction Notices but rejected the latter two, citing a failure by Hotelbeds to provide valid VAT invoices to support the recovery of input tax.

The central issue before the High Court was whether input tax could be reclaimed without a valid VAT invoice. Regulation 29 of the VAT Regulations 1995, grants HMRC discretionary authority to accept alternative evidence of a taxable supply in the absence of an invoice.

Hotelbeds argued that HMRC had misapplied this discretion by rigidly insisting on invoices and failing to properly consider the alternative documentation provided. They also claimed a legitimate expectation based on HMRC’s prior acceptance of similar Error Correction Notices.

The High Court agreed with Hotelbeds finding that HMRC had acted unlawfully by applying its discretion in the strict way it had and failing to properly consider the alternative evidence which was available. The court further noted that there was no apparent risk of fraud or tax loss, and that the underlying supplies were genuine.

The conclusions drawn by the High Court, indicate HMRC must exercise discretion under Regulation 29 fairly and consistently and that alternative evidence, when robust and credible, can in principle be sufficient to support input tax recovery.

Comments

We await HMRC’s follow up to the High Court decision and whether matters will proceed to judicial review or not.

During assurance events and inspections, HMRC’s default position is to disallow input tax recovery where a valid VAT invoice is not held. That should not be the end of the story, and Regulation 29 requires HMRC to consider whether any alternative evidence presented by the taxpayer, is sufficient to support input tax recovery, at their discretion. Where that alternative evidence is incomplete, inconclusive or lacking in some important respect, HMRC would apply the discretionary powers of Regulation 29 to disallow the claim to input tax. However, HMRC are obliged to consider alternative evidence, and where such evidence is clearly indicates there has been a supply received and that supply is one which is correctly subject to VAT, HMRC should apply their discretion accordingly.

Inconsistency in approach by HMRC in Hotelbeds certainly weakened their argument – HMRC had previously accepted the earlier claims, setting what the High Court considered to be a legitimate expectation that subsequent claims based on similar alternative evidence would be treated in the same way.

Taxpayers must strive to obtain valid VAT invoices to support their input tax recovery position, and this is very much the required approach. However, in instances where VAT invoices are not available the alternative evidence can still be invaluable, subject to its nature and detail. Specialist VAT advice should always be taken before relying on alternative evidence to support VAT recovery.

Please contact Nick Hart, VAT Partner, if you would like to discuss the points raised in this case, within the context of your business and its VAT recovery position.