VAT Insights - May 2025

There have long been questions over the VAT treatment of transfer pricing adjustment payments between related entities. Do such payments amount to consideration (or an adjustment of consideration) for VAT purposes or do they fall outside the scope of VAT? The issue has been considered on a number of occasions, most recently by the VAT Expert Group in a 2018 report in which it recommended that transfer pricing adjustments should be considered as outside scope of VAT where both parties have a full right to recover VAT. No action has been taken, however, to make specific provision for such adjusting payments and different Member States have taken different approaches to the issue.

The CJEU now has the opportunity to comment on the position in SC Arcomet Towercranes SRL (Case C-726/23) and the AG has recently published their opinion on the matter. Essentially, the AG has taken the view that one standard approach is not possible and that each case must be examined and analysed on its particular facts. Whilst that may be disappointing from a legal certainty perspective, it should not come as a surprise, at least in the absence of any Community legislation.

In this edition, we also cover the following developments:

• The Court of Appeal decision in WTGIL concerning the scope of the exemption for insurance intermediary services
• Another AG opinion, this time in in Högkullen AB, concerning the correct approach to applying the open market valuation provisions to intra-group management services
• The Upper Tribunal decision in Bolt, confirming that the services provided through a tax app fell within the scope of the TOMS scheme
• The FTT decision in Hastings that anti-avoidance provisions introduced into the Specified Supplies Order to counter offshore loop arrangements are contrary to EU law
• R&C Brief 2 (2025) concerning the treatment of state-regulated care providers that form a VAT group with non-state-regulated providers of welfare services.

We also have updates from across our European network, including Spain.

In addition, we produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with links to our more detailed reports.

If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch. Our contact details are at the bottom.

VAT and transfer pricing adjustments

SC Arcomet Towercranes SRL (Case C-726/23) is a case concerning payments between related parties based on a method recommended by the OECD TP Guidelines (in this case, the transactional net margin method). Under contractual arrangements between Arcomet Belgium and Arcomet Romania, Arcomet Romania was guaranteed an operating margin within the range -0.71% and 2.74%. To achieve this, an annual adjustment invoice was to be issued by Arcomet Belgium in the event of a profit in excess of 2.74% or by Arcomet Romania in the event of an excess loss below -0.71%.

Did payments from Arcomet Romania under these arrangements to Arcomet Belgium amount to consideration for supplies? The AG has ultimately taken the view that a “principled” answer to the VAT treatment of TP adjusting payments is not possible. Each case must be looked at on its facts. In this case, the AG considered that there was a clear, direct link between the payments and services provided by Arcomet Belgium. This was despite the fact that amounts would only be paid to the extent that Arcomet Romania achieved a profit margin in excess of 2.74%. Although the amount of consideration was uncertain, the terms of the payments were free from uncertainty. Also, the fact that the arrangements would require payments to go in the opposite direction (from Arcomet Belgium to Arcomet Romania) where the profit margin was -0.71% or less was not relevant to the analysis of the actual payments in this case.

The opinion is not surprising – indeed, it would be a surprise if the CJEU did not follow it. However, this does mean that the VAT treatment of TP adjusting payments will most likely continue to be the subject of some uncertainty, both on a technical level and also due to differences in approach between different Member States.

Read our Insights article here

Insurance intermediary services

Both the FTT and UT struggled to analyse a supply of a telematic device fitted in an insured’s car as a condition of taking out an insurance policy brokered by the company arranging the fitting of that device. Was it a supply to the policyholder at all? If so, was there any consideration for that supply? The insurance agent argued that there was, perhaps in the form of a barter, with the policyholder agreeing to enter into the policy of insurance in return. The Court of Appeal has now cut through these "beguiling" arguments around barter as consideration and held that the fitting of devices was simply part of the agent’s supplies of insurance intermediary services: WTGIL v HMRC [2025] EWCA Civ 399.

In doing so, the court has criticised the tribunals for adopting an over-compartmentalised approach to the situation. In contrast, the decision of the Court of Appeal emphasises the importance of standing back and viewing the arrangements as a whole and in context. Since there was nothing in the contractual arrangements to indicate otherwise, it was simply artificial and unrealistic to exclude the fitting of the devices from the over-arching supply of insurance intermediary services that was undoubtedly the main activity of the agent. Moreover, from the perspective of a policyholder, the provision and fitting of a device was simply an essential component of the insurance and not an end in itself. Policyholders would see the policy as a single transaction in return for an annual premium.

Read our Insights article here

VAT and taxi services

The VAT treatment of taxi services has long been a matter of contention. Taxi firms have long sought to restrict their supplies to the services they provide the drivers such that VAT is only accounted for on their commission, rather that the full fare. Perhaps only hair dressers have a longer history of VAT disputes!

The latest iteration of these disputes, HMRC v Bolt Services UK Ltd [2025] UKUT 100, involves businesses providing “mobile ride-handling services” via an app. Having essentially lost their case that drivers were independent operators rather than workers, both the FTT and UT have now held that their supplies of mobile ride-handling services to end customers fall within the Tour Operators Margin Scheme (TOMS). This may seem surprising on the face of it, given the lack of any connection with travel in the broader sense. However, CJEU jurisprudence makes it clear that TOMS is not restricted to the services of travel agents in the traditional sense and also that supplies of accommodation on its own can fall within the scheme. On this basis, the UT agreed with the FTT that a supply of travel services alone is also capable of falling within the scheme. In this case, the UT also rejected arguments that either the typical destinations chosen by customers or the fact that journeys were typically booked minutes (rather than weeks or months) in advance meant that the supplies were not sufficiently comparable to those provided by travel agents. There was no indication in the jurisprudence that a forensic investigation of comparability was necessary and the UT agreed that the test should be approached at a high level.

Given the sums at stake if VAT is only chargeable on the margin under TOMS, this case may still have some way to travel!

Read our Insights article in full here

Insurance offshore loop

In 2018, the FTT held that intra-group arrangements involving a UK insurance intermediary, Hastings, providing services to its Gibraltar based associated insurer did not involve that intermediary acting as a fixed establishment for VAT purposes of the Gibraltar insurer. The insurance provided in that arrangement was to UK customers and HMRC took the view that these "offshore loop" arrangements amounted to unacceptable VAT avoidance, since the UK intermediary was able to recover the input VAT it incurred on its supplies to the offshore insurer under the Specified Services Order.

In order to counter-act such "offshore loop" structures, HMRC introduced changes to the Specified Services Order restricting the scope to recover input VAT to circumstances where the person insured is not in the UK. However, in a follow up case brought by Hastings, the FTT has now held that those changes were contrary to the Principal VAT Directive. The PVD provides for the recovery of input VAT connected with certain supplies of financial services, including insurance, "where the customer is established outside of the Community". In this context, it was clear that the term "customer" meant the recipient of the relevant finance supplies. In this case, this was the offshore insurer and not the policyholder. As such, the changes made by to the Specified Services Order were contrary to EU law.

The case raises several difficult issues of interpretation, both in relation to the effect of the particular provisions and also the provisions dealing with retained EU law post Brexit. As such, and given the nature of the dispute and the amounts at stake (over £16m for Hastings alone), it seems highly likely that HMRC will appeal.

Read our Insights article in full here

Open market value of management supplies

The Principal VAT Directive contains provisions (Articles 72 and 80) that allow for open market value to be substituted for the actual consideration for supplies between related parties where the recipient is not fully taxable. How should the open market value of supplies of management from a parent to its subsidiary be calculated? The AG’s opinion in Högkullen AB v Skatteverket (Case C 808/23) considers this question.

Article 72 states that open market value is "the full amount that, in order to obtain the goods or services in question at that time, a customer at the same marketing stage at which the supply of goods or services takes place, would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax". However, where there is no comparable supply, then it means, for services, "an amount that is not less than the full cost to the taxable person of providing the service".

The AG's opinion is a useful appraisal of these provisions, including in what circumstances a comparable price can be used. It remains to be seen what approach the CJEU will take, but, in the meantime, the AG has suggested a pragmatic approach which allows for the use of comparable prices where available, excludes irrelevant expenditure and requires capital expenditure to be amortised over time.

Read our Insights article in full here

VAT grouping within the care industry

VAT grouping has been an area of concern for HMRC for some time with a number of recent cases dealing with the inclusion of overseas members in a VAT group. Now HMRC has published R&C Brief 2 (2025) concerning the treatment of state-regulated care providers that form a VAT group with non-state-regulated providers of welfare services. The Brief notes that HMRC has identified a growing use of VAT grouping structures to recover VAT on costs that relate to welfare services that would otherwise be exempt from VAT, by incorporating an unregulated entity into the supply chain between the state-regulated provider and the local authority or NHS entity to which the supply is made. HMRC consider such arrangements to be a form of tax avoidance and, as such, will refuse new applications for VAT grouping registrations in this situation and investigate existing structures.

Read R&C Brief 2 (2025) here

Spain: Navigating VAT and Transfer Tax in hotel transfers

The core issue in determining whether a hotel property transfer is subject to VAT or Transfer Tax lies in defining an 'independent economic unit' (in essence, a transfer of a going concern or TOGC). According to Spanish VAT law, transfers of assets forming part of a TOGC are not subject to VAT. However if a transaction including real estate assets is part of a TOGC and so not subject to VAT, it falls under the Spanish Transfer Tax, significantly increasing acquisition costs. The ambiguity surrounding the definition of an 'independent economic unit', introduced by Law 4/2008 and influenced by the CJEU case Zita Modes (Case C-497/01), has led to uncertainty, exacerbated by differing interpretations between the Spanish central (responsible for VAT) and regional tax authorities (competent to collect Transfer Tax).

The General Directorate of Taxes in Spain (DGT) has consistently emphasised the importance of human resources in determining an 'independent economic unit', asserting that a hotel transfer must include not just the property but also the organisational structure and resources necessary for independent operation. This stance has been most recently confirmed in a recent binding tax ruling of February 2025 and is also supported decisions of the Central Economic-Administrative Court (TEAC), the highest administrative tax court in Spain. Conversely, some regional tax authorities, relying on a more restrictive 2016 Supreme Court ruling, continue to argue that merely transferring a hotel property with some licences may constitute an 'independent economic unit', thus subjecting the transaction to Transfer Tax instead of VAT.

This divergence in criteria creates significant uncertainty for hotel sector investors, leading to inconsistent tax liabilities depending on the property's location. The original intent of the VAT Directive was to avoid the financial burden of VAT on business transfers, yet the approach of some regions in Spain leads to a contrary effect. In the absence of clear legal or judicial guidance, it is advisable to thoroughly analyse each hotel property sale transaction, considering judicial decisions, tax rulings and regional tax authority criteria based on the property's location.

Other issues we have recently covered

Capital allowances and windfarms

In an important decision for large scale capital projects, the Court of Appeal has overturned the decision of the Upper Tribunal denying capital allowances on expenditure on environmental and technical studies in advance of designing and installing wind turbines on an offshore windfarm: Orsted West of Duddon Sands (UK) Ltd, Gunfleet Sands Ltd and others v HMRC [2025] EWCA 279. The Court of Appeal rejected arguments that expenditure “on the provision” of plant should be given a restrictive meaning, limited only to expenditure directly on the provision, including installation, of the plant. Rather, the normal meaning of the phrase indicated that it should also encompass the costs of designing the relevant plant and the Court accepted that qualifying expenditure in that context can also extend to studies which may not themselves contain the designs but which inform the design of the relevant plant. The decision will be a relief to those operating in the sector and is also clearly welcome from an environmental and net zero perspective. The relevant expenditure in this case was significant (some £48m) and failure to allow capital allowances on such expenditure would discourage investment into this vital part of the energy industry.

Advance tax certainty for major projects

As part of the Spring Statement, HM Treasury has published a consultation on "Advance tax certainty for major projects", proposing that the government will introduce a new process for giving major investment projects increased tax certainty in advance to further improve the UK's position as an advantageous investment location. The proposal would appear to be a more formal version of the existing tax support provided by HMRC to overseas businesses investing in the UK, but expanded to projects that are not limited to those involving inward investment from outside the UK.

The consultation also announces the government's intention to publish an updated Statement of Practice setting out a policy and conditions for entering into APAs dealing with the transfer pricing treatment of cost contribution arrangements between group companies sharing the costs and benefits of developing assets such as IP.

Salaried member rules: updated guidance

Following intensive discussions over recent months, HMRC has revisited its guidance on the application of the anti-avoidance rules to capital contributions made by members of an LLP in order to fall outside the salaried member rules. The changes now make it clear that the motivation for the payment is not in itself determinative of whether the anti-avoidance rules apply and that HMRC will look to whether the contributions are genuine, enduring and involve real risk to the member making the contribution. These changes to the guidance are certainly welcome and largely return the position to the pre-2024 state of play.

Spring Statement: macro perspective

Our economic analysis of the Spring Statement 2025 delivered on 26 March 2025.