VAT Update – September 2025

HMRC has published the latest advisory fuel rates (AFRs) for company cars, effective from 1 September 2025.

AFRs are mileage reimbursement rates used when employees using a company car for business travel purposes are reimbursed for fuel costs and for when employees need to repay the cost of fuel for private travel in a company car. Businesses also use AFRs to determine the fuel cost element of business mileage, for VAT recovery purposes.

These rates are reviewed by HMRC quarterly on 1 March, 1 June, 1 September and 1 December.

Key points

• Petrol vehicles remain the same as the last quarter at 12 to 22 pence per mile (ppm) depending on the engine size.
• Diesel vehicles have slightly increased AFRs compared to 1 June: 12 to 18 ppm depending on the engine size.
• The most notable change relates to the use of electric vehicles (EVs) as company cars. The previous flat rate of 7ppm has now been replaced with two distinct rates: 8ppm for home charging and 14ppm for public charging.

VAT recovery on road fuel

When a business pays for road fuel, there are four main approaches to VAT recovery, depending on the circumstances.

• Full VAT recovery, 100% taxable business use. Businesses can recover all VAT on fuel where it’s used exclusively for taxable business purposes. This typically applies to pool cars or other vehicles that are not being used for private journeys.
• Full VAT recovery with scale charges or employee reimbursement. Where vehicles are used for both business and private purposes, businesses may recover all VAT and pay a fuel scale charge, or account for VAT based on amounts charged to employees for private use.
• VAT recovery based on mileage records. Businesses may choose not to apply scale charges and instead recover VAT only on the business element of fuel costs. This requires detailed mileage records to be kept to demonstrate that only the business element of the VAT paid on fuel has been treated as input tax.
• No VAT recovery. In cases where total mileage is low, applying scale charges may result in a VAT liability greater than the input tax recoverable. In such instances, businesses may opt not to recover any VAT on fuel.

VAT recovery on fuel purchased by employees

Where employees purchase fuel and are reimbursed for business travel, the VAT element can be recovered, provided the business can demonstrate that reimbursement was made either for the employee’s actual expenditure (supported by VAT receipts), or via a mileage allowance.

If a mileage allowance is used, input tax is calculated by applying the VAT fraction (1/6 in the case of 20% standard rate VAT) to the fuel element of the allowance. Businesses must retain appropriate records for each employee claiming mileage, including journey details and the rate applied.

VAT recovery on EV charging

When it comes to VAT recovery on electricity used for charging EVs, businesses are currently able recover VAT on electricity consumed at the workplace or at public charging points, provided the electricity is used for business purposes and appropriate records are maintained. However, VAT recovery for home charging is only permitted where the EV is used for business purposes by a sole proprietor or a partner in a partnership. Where employees charge company EVs at home, VAT recovery is not permitted, as the electricity supply is considered to be made to the employee rather than the business.

It’s understood HMRC is considering its policy in cases where employees are reimbursed for the actual electricity costs incurred while charging EVs for business use. It’s also considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use.

Comments

As part of the government’s Clean Power 2030 Action Plan, substantial investment has been made in vehicle electrification. EVs are increasingly becoming the preferred mode of transport for both personal and business use. The recent update to AFRs for EVs strengthens the government’s drive to reduce carbon emissions by incentivising businesses to adopt electric company cars.

VAT recovery on electricity costs for charging EVs remains a matter under review and for further discussion. While AFRs are commonly used to calculate VAT recovery on the fuel cost element of business mileage, the application of these principles to electricity is less straightforward. We look forward to further guidance on this from HMRC in due course.

The approach to VAT recovery on road fuel costs is commonly looked at by HMRC during assurance events and audits, so businesses are encouraged to ensure they are adopting one of the accepted approaches and are keeping sufficient records to support this.

Please contact Nick Hart, VAT Partner, for further details.

Where there is a consideration for a supply

A recent First-tier Tax Tribunal (FTT) case, Airline Placements Limited v HMRC [2025] UKFTT 894 (TC), considered the VAT treatment of a security bond paid by cadets to Airline Placements Limited (APL) as part of their training, and whether the security bond constituted a consideration for a supply.

APL procured airline pilot training for cadets, and, on qualification, APL placed the pilots with commercial airlines in return for a placement fee, equal to the cost of the cadet’s training. The cadets were initially required to pay a security bond to APL which was equal to the cost of their training. On completion of the training and following a successful placement of a pilot, APL would transfer the bond to the sponsor airline.

APL accounted for the VAT on the placement fee but did not account for VAT on the security bond.

HMRC took the view that the security bonds were consideration for the supply of training by APL and assessed for underdeclared VAT. HMRC concluded there was a clear reciprocity between the payment of the bonds and the provision of the training.

APL appealed HMRC’s decision, on the basis that the security bonds were not consideration for training but were a means to ensure the cadets’ commitment. APL believed the training was effectively sponsored and paid for by the airline through placement fees. In addition, as part of the training had taken place outside the UK, APL contended that a proportion of the training, which related to the training overseas, was outside the scope of UK VAT.

It was noted that the sponsor airlines would reduce the cadet salaries to recoup the training placement fee, effectively shifting the training cost to the cadet through salary sacrifice.

The FTT concluded that while the formal contracts described the payments as security bonds, the reality was that they were consideration for training as the cadets ultimately bore the costs through salary adjustments post procurement.

The FTT partially allowed APL’s appeal to reflect the element of training, which was delivered outside of the UK, but upheld HMRC’s decision that the security bond was a supply for consideration and therefore was within the scope of VAT.

Comments

For an activity to be within the scope of VAT it must be undertaken for a consideration paid in return. That consideration can be cash but can also be non-monetary in nature.

In this case, as is often seen at tribunal, how something is described and treated from a contractual perspective, can often differ to what it is in practice. Any form of payment being made and received in a commercial situation, needs to be carefully considered in terms of whether it’s a consideration for VAT purposes. Substance over form often prevails in these circumstances.

Particular businesses who provide training or who operate in specialist training sectors should ensure their funding arrangements are reviewed in light of this decision to ensure they are treating payments received as consideration for supplies made, where that is the economic reality, even though the payments may be described differently within the contractual arrangements.

Please contact Nick Hart, VAT Partner, if you would like to discuss the implications of this case in more detail.

When considering VAT, the matter of Transfer Pricing (TP) and TP adjustments can often be overlooked. A recent case in the Court of Justice of the EU has just considered this.

HMRC’s internal guidance states that a “Transfer Pricing adjustment is not in itself a supply nor consideration for a supply. It is an indication that transactions or arrangements may not have been at ‘arm’s length’ values. It may therefore point to an under valuation of the subject supply for VAT purposes”.

When officers encounter TP adjustment they should consider if there is a “misvalued reverse charge on imported services”. If the TP adjustment doesn’t constitute consideration for a service, it wouldn’t be within the scope of VAT.

In its judgement in Arcomet Towercranes (C-726/23), the CJEU viewed the TP adjustments to align profits following OECD TP guidelines in this case, were subject to VAT as they were a consideration for services.

Arcomet Romania is part of a group in the crane rental sector, its parent Arcomet Belgium seeks suppliers, negotiates with suppliers and there was importantly a contract for services between Arcomet Belgium and Arcomet Romania. An invoice was raised by Arcomet Belgium for services and there was an annual settlement where excess annual profits in Arcomet Romania were greater than 2.74%. The case was in respect of three invoices. Two where the reverse charge was applied and one which was treated as outside the scope.

The Romanian tax authorities refused the deduction on the TP adjustment on the grounds that Arcomet Romania had not demonstrated that the services had been supplied and were necessary for the purposes of the Romanian business’ taxable transactions. They did insist the VAT already paid over on the services received was still due under the reverse charge but without the right to deduct.

Two questions were referred to the CJEU. Did the amount invoiced constitute payment for a supply? And was the invoice, which did not specify the nature of the services, sufficient to allow for the deduction of the VAT?

The CJEU found that services were provided by Arcomet Belgium to Arcomet Romania as per the agreement and the remuneration reflected the services provided. Therefore, this was an economic activity and therefore the invoices, even for TP payments, were within the scope of VAT even though the values were dependent on profits and losses (as per the transactional net margin method TP methodology which had been adopted in this case), and the amount was uncertain until the year end position had been determined.

The CJEU also confirmed that the tax authority could not refuse the right to deduct VAT simply because the invoice does not satisfy certain formal conditions where there is sufficient additional information available to determine the substantive conditions for the right to deduct are satisfied.

Comments

The Arcomet case is helpful to further advise the VAT approach to be applied with respect to TP adjustments. A blanket approach is not applicable and the facts and circumstances in each case will determine whether a TP adjustment does have VAT implications or whether it’s outside the scope of VAT altogether. The TP methodology being applied, the contractual arrangements with respect to intra-group supplies of goods or services, and the commercial reality, are all important elements which need to be taken into account. Further EU cases on the matter are in the pipeline so additional insight will be available in due course.

Arcomet acts as a reminder of the need to apply the VAT reverse charge with respect to make intra-group service situations. Where the recipient is not fully taxable, the reverse charge creates a VAT cost. We have also seen HMRC trying to refuse the right to deduct where invoices have been insufficiently detailed and therefore businesses should consider how they describe the services provided on their invoices to ensure that these are not challenged by HMRC.

If your transfer pricing arrangements have not been reviewed for VAT purposes, please do get in touch with Nick Hart, VAT Partner, for a discussion on the topic.

Derby College Group (DCG) has successfully appealed against HMRC before the First Tier Tribunal (FTT) in the case of Derby College Group v HMRC [2025] UKFTT 968 (TC).

DCG is a further education organisation, providing both accredited and non-accredited vocational courses.

The dispute centred on whether government grants received by DCG —from agencies such as the Skills Funding Agency (SFA) and Education Funding Agency (EFA), is payment for the supply of education and vocational training provided free of charge to students. HMRC had issued VAT assessments totalling nearly £2 million for the periods between 2015 and 2018, based on output tax adjustments under the ‘Lennartz’ accounting method. Under Lennartz accounting, the college had claimed input tax on capital costs, intending to account for output tax over a 10-year period to reflect the non-business use of the assets.

The FTT held that the grants did not constitute consideration for the supply of education and vocational training. This decision followed the precedent set by the Upper Tribunal (UT) in Colchester Institute Corporation v HMRC [2020] UKUT 368 (TCC), which confirmed that such funding does not amount to consideration where education is provided free of charge.

As a result, the FTT concluded that the college was not making taxable supplies in this context. Consequently, the college’s appeal was upheld and HMRC’s assessments were dismissed.

Comments

The FTT here was bound by the previous UT decision in Colchester Institute Corporation. This decision is to be further heard in the Court of Appeal in 2026, but for the time being is binding, as noted by the FTT in the Derby College Group case. Similar providers of free education (which is funded by government grants) should review their position and take advice as to the position to adopt until the 2026 Court of Appeal opines on Colchester Institute Corporation.

Please contact Nick Hart, VAT partner for further details.