Should the VAT system enable tax authorities to penalise innocent but careless taxpayers? Irrespective of your view on the answer to this question, the reality is that the VAT system does indeed provide tax authorities with the power to penalise taxpayers who do not know of fraud within their supply chain but, objectively, should have known of the existence of that fraud. As such, the VAT system imposes on taxpayers not just a duty of honesty, but a duty to carry out due diligence on their supply chains. The latest example of this principle in action is the decision of the Court of Appeal in Impact Contracting Solutions Ltd v HMRC, where the Court has confirmed that HMRC do have the power to deregister a taxpayer in this situation.
In this edition as well as covering the Impact Contracting Solutions case, we also cover the following developments:
- An AG opinion on the meaning of consideration for VAT purposes in the context of third party payments of legal fees under statutory provisions
- A CJEU decision on the extent to which subsidies received by the operator of a public transport services might amount to consideration for those services
- Those announcements made as part of the spring 2025 tax update which relate to VAT.
We also have updates from across our European network, including Spanish VAT developments.
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.
Cancelling a VAT registration and abuse of law
It is clear that the abuse of rights principle allows a tax authority to disregard transactions and make a taxpayer liable for VAT lost to fraud where it knew or should have known of that fraudulent activity. But what about cancelling a taxpayer's VAT registration altogether? In Impact Contracting Solutions Ltd v HMRC [2025] EWCA Civ 623, the Court of Appeal has held that HMRC did have that power, even where the trader made otherwise genuine taxable supplies. The decision highlights the wide-ranging nature of the abuse of rights principle in relation to VAT and the ability of tax authorities to counter abusive arrangements where a taxpayer knew or should have known that they are involved in such arrangements..
Read our Insights article here
Contingency fees and third party consideration
Do statutory payments made by the losing party in litigation to the lawyer of the successful party amount to third party consideration for VAT purposes? For payments to amount to consideration, they must be a direct link between the service and the payment. This normally requires some contractual or other mutual obligation for payment between the recipient of the service and service provider, but in the case of TPT v Financial Bulgaria EOOD (Case C-744/23) the lawyer had provided their services to the successful litigant on a pro bono basis. Nevertheless, the Bulgarian statutory rules included a provision entitling the lawyer to be paid a fee by the losing party in these circumstances. Was this payment consideration for the lawyer's services provided to the successful litigant?
The AG has opined that the payment was consideration for those services and, as such, subject to VAT. Neither the fact that the payment was required by legislation, came from a third party or was contingent on the outcome of the litigation prevented the existence of the necessary direct link. Indeed, the AG has taken the opportunity to clarify the earlier suggestion of the CJEU in Bastova (Case C-432/15) that a prize paid to a winning owner in a horse race does not amount to consideration on the basis that the award of the prize is subject "to a degree of uncertainty". The AG criticised that reasoning and pointed out that the true reasoning in that case was that the payment of the prize is not made for any service, but for winning (and winning is not a service).
Read the AG opinion in full here
Subsidies as consideration
Another area that regularly causes problems in relation to "consideration" is the payment of subsidies and grants. To what extent are such subsidies or payments (again often paid by someone other than the direct recipient of the service) consideration for that service or indeed for some other service? That is the question again before the CJEU in Dyrektor Krajowej Informacji Skarbowej v PSA (Case C-615/23).
A subsidy can either be consideration for a taxable supply made to the payer of the subsidy (under general principles) or may be consideration for a taxable supply to the ultimate recipient of the services. In this case, the CJEU has held that the payment of a subsidy (referred to as compensation in the decision) to cover a shortfall (based on a calculation including the kilometres covered by a public transport network) does not amount to consideration for a supply of public transport to the end users, since the subsidy did not directly affect the ticket price of individual transport services. The existence of an indirect link between the ticket prices and the services (on the basis that ticket prices would need to have been higher without the subsidy) is not sufficient to make the subsidy consideration for VAT purposes.
Read the CJEU decision in full here
Spring 2025 tax announcements
On 28 April, the government published a package of technical tax policy proposals. These included a number relevant to VAT, including the following:
- to remove computers from the assets covered by the capital goods scheme and increase the capital expenditure value of land, buildings and civil engineering work, currently set at £250,000 to £600,000 (exclusive of VAT_ to fall within the scheme
- to align the VAT treatment of business donations of goods to charity for goods donated to charity for sale or for onward donation or the delivery of the charity's services
- a response document to the earlier 2024 consultation on legislative reform of the Terminal Markets Order, indicating that the government will continue to develop a reformed legislative framework based around principles-based drafting and the use of lists. There will be continued engagement with industry stakeholders, including consulting on draft secondary legislation in due course
- to review the merits and value of further reform to the rules which require online marketplaces to account for VAT in certain circumstances
See the announcements in full here
Spanish mixed holding companies and VAT: taxable supply of management services
In a recent binding ruling of March 2025, the Spanish General Directorate of Taxes (GDT) addressed the VAT implications for mixed holding companies, which are entities that, in addition to holding shares, actively manage their subsidiaries and which may provide several ancillary services.
Building on previous guidance which applies the underlying principles in CJEU case law, the GDT clarified that when a holding company provides management or administrative services to its subsidiaries, and in particular the services of a sole director, these activities constitute VATable services.
Furthermore, if opting for the VAT group regime, the intra-group services will also be subject to VAT, but on a reduced taxable base limited to the cost of the services used (it should be noted that Spain has not implemented for the moment the full VAT consolidation regime foreseen by the VAT Directive, which would allow group entities to act as a single taxable person for VAT purposes, implying greater fiscal integration).
Mixed holding companies must carefully evaluate their intragroup service arrangements and VAT compliance strategies to ensure alignment with both national and EU rules, thereby mitigating potential tax exposures.
Other issues we have recently covered
Reform of transfer pricing, DPT and PE rules
The government has published a further consultation together with draft legislation on changes proposed to be made to the UK transfer pricing, diverted profits tax (DPT) and permanent establishment (PE) rules. The publication indicates that the government will, broadly, be taking forward the proposed changes announced in 2024 as part of the response to an earlier consultation on these topics. These include restricting UK:UK transfer pricing, merging DPT into the broader corporation tax rules and bringing the UK definition of PE more into line with the 2017 OECD definition.
In April 2023, the then government published a consultation proposing to replace Stamp Duty and SDRT with a new single tax on transactions in securities. Two years later, the government has now published a summary of responses to that consultation together with its plans to take forward the main proposal. In essence, the government will introduce an online portal for the reporting and payment of the new single tax on transactions in securities and aims to have the new tax and portal up and running in 2027. At the same time, the government is also taking the opportunity to consult on some more detailed features of the current 1.5% SDRT charge on transfers into clearance and depository receipt systems.
The Court of Appeal has upheld the decisions of the lower tribunals that distributions made out of share premium account by a Jersey company to a UK shareholder were not "dividends of a capital nature": Beard v HMRC [2025] EWCA Civ 385. Under Jersey law, the share premium was freely distributable such that the distribution out of share premium account amounted to an income distribution in the same way as other payments out of distributable profits. It was important that the method used to make the distribution in this case was the same method used to make normal distributions of trading profits.
HMRC guidance on unallowable purpose updated again
On 7 May, HMRC published a significant update to their guidance on the application of the unallowable purpose anti-avoidance rule within the loan relationships tax regime. The changes are designed to bring the guidance up-to-date for recent, significant Court of Appeal decisions, such as BlackRock, Kwik-Fit, and JTI. Most notably the sections on how "purpose" is to be determined and what is the main purpose of the arrangements have been extensively rewritten.
Salaried member rules: members with influence
The Court of Appeal has held that the FTT and UT incorrectly interpreted Condition B in the salaried members' rules and has referred the case back to the FTT on this issue: BlueCrest Capital Management (UK) LLP v HMRC [2025] EWCA 23. The Court has held that, on a true construction of Condition B, it is only those enforceable rights and duties that arise from the LLP agreement, statute or potentially elsewhere that may be taken into account in determining whether a member has significant influence over the affairs of the LLP. In taking into account the de facto influence wielded by members with capital allocations of $100m or more, the FTT and UT had made an error of law and the correct procedure was now to refer the matter back to the FTT for a decision based on the correct interpretation of the law.
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