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, including by the VAT Expert Group in a 2018 report in which it recommended that transfer pricing adjustments should be considered as outside the 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 adjustment payments and different Member States have taken different approaches to the issue. Against this background, it is, therefore, unsurprising that the CJEU has held in SC Arcomet Towercranes SRL (Case C-726/23) that payments based on guaranteed operating margins calculated using transfer pricing methodologies between two related entities under contractual arrangements amounted to consideration for supplies. The mere fact that the amount of the payments were calculated to comply with transfer pricing rules did not detract from the fact that there was a direct link between the payments and the contractual obligations to provide services.
In this edition as well as the CJEU decision in Arcomet Cranes, we also cover the following developments:
- A CJEU decision, in the context of the application of open market value rules, stressing that supplies between a parent and subsidiary cannot, as a matter of principle, be treated as a single supply
- An FTT decision exemplifying the principle that contractual labels will not determine the VAT treatment of supplies
- A follow up decision of the CJEU on the circumstances when overcharged VAT included on an invoice need not be paid to tax authorities
- An FTT decision critical of HMRC’s decision to apply the Supreme Court decision in Zipvit to a contractual scenario where the consideration was VAT inclusive
- An FTT decision on the correct approach to hardship applications where HMRC is seeking to wind up the taxpayer on the basis it cannot pay its debts as they fall due
- A CJEU decision on the application of the single supply rules to administrative services for claiming a VAT refund on the goods sold to the customer
- An FTT decision highlighting that a failure to carry out appropriate due diligence will not necessarily lead to the conclusion that the trader should have known that transactions were connected to fraud; and
- An Upper Tribunal decision that that it is not necessary for HMRC to show that the directors of a company knew or should have known that the company was part of a fraudulent tax arrangement in order to deregister it under the Ablessio principle.
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.
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 CJEU has held that, in this case, 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 decision is not surprising. However, the decision is one on its particular facts and will not necessarily apply to all such arrangements. As such, it seems likely 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
Supplies of management services
In JP Morgan Chase [2025] UKUT 188, the Upper Tribunal recently held that supplies made under an all-encompassing group support services agreement amounted to a single supply. It also found that the FTT’s view that the aim of the customer was, essentially, to receive everything it needed to carry on its business was supportable. That decision can be contrasted with the CJEU decision in Högkullen AB v Skatteverket (Case C-808/23) that it is not possible to conclude, as a matter of principle, that management services provided by a parent company to a subsidiary are so closely linked that they form, objectively, a single, indivisible economic service so as to amount to a single supply.
The question arose in quite different circumstances in this case. Högkullen provided services to its subsidiaries, including business management, financial, real estate and IT and staff services. 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 and the Swedish tax authorities sought to apply these provisions. What was in dispute was the amount of the open market value in this case and whether the nature of the supply precluded the use of comparables. The decision of the CJEU was that it could not be said that management services of the type provided by the parent company in this case should always be treated as a single supply and, as such, preclude the open market value of those services from being determined using the comparison method laid down in the first paragraph of Article 72 of that directive.
Read our Insights article in full
Economic reality and contractual labels
It is clear that the labels applied to payments by parties will not necessarily define their VAT treatment, especially where the economic reality points in a different direction. The decision of the FTT in Airline Placement Ltd v HMRC [2025] UKFTT 894 is an excellent example of this and highlights the unfortunate VAT consequences that can result.
Airline Placement Ltd (APL) put in place a Sponsored Training Programme (STP) as an alternative to airlines paying upfront for the training of their future pilots. Under the STP, a Sponsor Airline would pay a placement fee (equal to the cost of training) plus VAT on employing a fully trained cadet whose training had been paid for by APL. Cadets were required to pay an amount equal to the cost of the training as a “security bond” to APL. On paying the placement fee, the Sponsor Airline would receive a transfer of the (amount of the) "security bond" from APL. The initial salary paid by the Sponsoring Airline to pilots trained under the STP was at a reduced level but the trained pilots also received repayments of the security bond over that same period from the airline. This enabled the Sponsor Airlines to defer the (expensive) training costs of their pilots. In the event that the cadets were not placed with a Sponsor Airline, the bond would be forfeited.
The FTT held that it was clear that the payment of a “security bond” was, in economic reality and when looked at across all the totality of the arrangements, clearly consideration for a taxable supply of training. Ultimately, this was achieved through a reduction in the salary received by those cadets over their first five years of work for the Sponsor Airline, but it nevertheless made it clear that they bore the cost of the training. The unfortunate result was that this analysis essentially led to double taxation as, in addition to the VAT on the supply of training to the cadet there would also be VAT on the supply of that same training under the placement fee.
Read our full Insights article here
Overcharged output VAT
In P GmbH v Finanzamt Osterreich (Case C-378/21), the CJEU held that the obligation to pay the full amount of VAT incorrectly shown on an invoice does not apply where the recipient is exclusively a final consumer who is not entitled to deduct VAT. But what of the situation where some but not all customers are final consumers not entitled to deduct VAT? Can the principle still apply? On a referral back to the CJEU in this same case, Finanzamt Osterreich v P GmbH (Case C-794/23), the CJEU has confirmed that the principle is not limited to a situation where all of the recipients are final consumers with no right to deduct input VAT. Indeed, the Court has indicated that where there is a mixture of taxable and non-taxable recipients, it may be appropriate to use an estimate of the proportions of each to determine the amount of VAT payable. However, the Court rejected the argument that the same principle could be applied where the recipients are VAT exempt.
Whilst the decision is not binding in the UK, it does call into question the UK rules in VATA 1994 Sch 11 para 5 which specifically provide that any amount charged as VAT on an invoice is recoverable as a debt due to the Crown whether or not VAT was actually chargeable.
Read our Insights article here
Zipvit and input VAT claims
The FTT has taken the unusual step of criticising HMRC’s conduct in Motorplus Ltd v HMRC [2025] UKFTT 931. The case concerned a claim to recover input VAT by the taxpayer in circumstances where it appears there was disagreement between the supplier and taxpayer as to the correct VAT treatment. The supplier treated the supply as exempt, whilst the taxpayer considered that it was a taxable supply. As the contract provided for the consideration to be VAT inclusive (at least this was assumed to be the case for the purpose of the FTT decision), the taxpayer claimed input VAT but did not have a VAT invoice.
When the taxpayer appealed HMRC’s rejection or its claim for input VAT, HMRC sought to strike out the appeal on the basis that the appeal had no reasonable prospect of success. The FTT had no problem in rejecting HMRC’s strike out application, criticising HMRC’s conduct in the process. In particular, HMRC had relied on the Supreme Court decision in Zipvit to support the denial of the input VAT claim. However, it was clear that Zipvit was a case where both parties assumed the supply to be exempt. Only later did it become clear that the supply was taxable and the contract provided for the consideration to be VAT exclusive. This was quite different to the present case where the recipient considered the supply to be taxable and the consideration was VAT inclusive.
In this case, HMRC had failed to make any assessment as to whether the supply was exempt or taxable which was clearly necessary before they could conclude that no input VAT had been incurred. Accordingly, the application to strike out was rejected by the FTT.
Hardship applications
The VAT rules generally make it a requirement for a taxpayer to pay any disputed VAT upfront before bringing an appeal, unless the taxpayer can show that they would suffer hardship as a result of that requirement. In Clear Pay Payroll Ltd v HMRC [2025] UKFTT 916, HMRC were seeking a winding up petition in relation to the taxpayer on the basis that it was unable to pay its debts as they fell due, largely as a result of assessment for unpaid VAT of over £350,000.
The taxpayer appealed those assessments and, quite naturally, considered that its hardship application would be a formality on the basis that HMRC were themselves arguing it was unable to pay its debts. However, there followed a somewhat farcical back and forth with HMRC demanding the taxpayer respond to HMRC’s series of standard requests (mostly applicable to companies with a continuing business) for information to determine the hardship application and responses (without the requested information) from the company pointing out that HMRC must accept the hardship application since it was seeking to wind up the company on the basis that it could not pay its debts as they fell due.
This ultimately culminated in an application to the tribunal to determine the hardship application under section 84(3B)(b). The FTT rejected the suggestion that simply because HMRC had instigated a winding up application the hardship application must succeed. The grounds for winding up and the test for a hardship application under VATA 1994 section 84(3B) are very different and it could not be assumed that the taxpayer was entitled to succeed in the hardship application simply as a result of HMRC’s winding up petition. However, on the evidence (which HMRC had not considered), it was clear that the hardship application should succeed.
Read the FTT decision in full here
VAT-free export administration fees
Hatar Diszkont Kft (Case C-427/23) concerns the question of the correct VAT treatment of a fee charged by a seller of goods for processing the VAT free export documentation. At first sight, one would be forgiven for thinking the issue straightforward. It is consideration for carrying out a supply of services and subject to VAT. The Advocate General, however, adopted a more nuanced analysis and suggested there was no separate supply at all. The fee simply represented either an additional amount charged for the goods or, if there was a discrete service, then it was one that was entirely dependent and ancillary to the main supply of the goods.
The CJEU has held that the circumstances do not give rise to a single supply and nor is the consideration simply further consideration for the main supply. The purchase of the goods and the VAT refund administration services could not be regarded as so closely linked so as to form an indivisible single economic supply. It was quite possible for the supply of goods to take place without the refund services and whilst the services were "connected", a connection is not sufficient. Moreover, the refund services could not be said to be "ancillary" to the sale of the goods. The activity of administering VAT refunds pursued an objective which was independent to the supply of the goods. The supply of goods was completed as soon as they were paid for, without the additional service being necessary.
Read our Insights article here
MTIC fraud and due diligence
The decision in Red Rose Payroll Ltd v HMRC [2025] UKFTT 878 highlights that deficient due diligence will not necessarily be sufficient, on its own, to justify the application of the Kittel principle. Ultimately, the question is whether the trader knew or should have known that their transactions were connected with fraud, not did they carry out appropriate due diligence.
The taxpayer in this case, RRP, provided payroll services. It became involved with another company, WM, which, in essence, found clients for those services and outsourced the actual payroll functions to RRP. It transpired that WM fraudulently failed to account for VAT and HMRC, as a result, sought to deny RRP input VAT deductions of some £7.2m and deregister RRP as a result of its involvement with WM. The FTT accepted that RRP failed to carry out proper due diligence on WM in two key respects, however, rejected HMRC’s argument that this was sufficient to show that RRP should have known that its transactions were connected with fraud. “The point about due diligence and the context referred to in Moblix is that ‘tick box’ due diligence is not enough. So, it will not be open to a trader to carry out superficial due diligence and expect that to, necessarily, be sufficient. The corollary of that is that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known but had, in effect, turned a blind eye to the connection with fraud.” As that was all HMRC has been able to establish in this case, the FTT concluded that HMRC had failed the burden on it to show that RRP should have known its transactions were connected with fraud. Ultimately, “[Inadequate due diligence] may be a starting point (and often a good one), but it will rarely be all that is required”.
Application of the Ablessio principle
The Upper Tribunal in Elphysic Ltd and others v HMRC [2005] UKFTT 236 has held that it is not necessary for HMRC to show that the directors of a company knew or should have known that the company was part of a fraudulent tax arrangement in order to deregister it under the Ablessio principle.
The case concerns companies involved in a mini-umbrella company (MUC) scheme designed to obtain tax benefits from the misuse of the employment allowance and flat rate VAT scheme. One of HMRC’s countermeasures was to deregister the companies for VAT purposes under the Ablessio principle. However, the companies successfully argued before the FTT that since HMRC had not shown that the directors of the companies (who were in essence overseas “in name only” directors) knew or should have known that they were involved in the fraud.
The Upper Tribunal noted that the true principle to be derived from Ablessio (itself based itself on the Halifax principle) involved preventing the use of VAT registration for VAT fraud and involved a question of proportionality in applying that principle. However, it was “difficult to conceive of a more proximate involvement of a company in VAT fraud than it being the very means by which the fraud is being carried out”. In those circumstances, there was no additional requirement concerning the knowledge of the directors of those companies.
The decision confirms HMRC’s power to deregister entities being used to perpetrate fraud even (in the perhaps rare scenarios) where the directors of those companies have no knowledge of the fraud. This is an important confirmation for HMRC, at least in the context of combatting the MUC schemes, which HMRC have indicated involves over 18,000 MUCs used to defraud the public revenue of hundreds of millions of pounds.
Other issues we have recently covered
The government has published a Transformation Roadmap outlining the government’s vision for a more efficient, modernised and automated tax and customs system. The Roadmap is based on the government’s three priorities of: improving day-to-day performance for individuals and businesses; closing the tax gap; and driving reform and modernisation of the UK’s tax and customs system.
First prosecution for failure to prevent facilitation of tax evasion
HMRC brings first corporate prosecution for failure to prevent the facilitation of tax evasion. The prosecution marks a turning point in HMRC's approach to enforcement amid mounting criticism of its failure to bring charges under the offences which came into force on 30 September 2017.
Main purpose and inevitable effects
The Upper Tribunal has overturned the decision of the FTT in Osmond and Allen v HMRC [2025] UKUT 183. The FTT had held that, for the purpose of the transaction in securities anti-avoidance provisions, the fact that the taxpayers had a main purpose of crystallising the CGT exemption on their shareholdings (being concerned that a change of government might remove the benefit) necessarily meant that they also had a main purpose of obtaining an income tax advantage based on a reading of the relevant definition of “income tax advantage”. The Upper Tribunal has now held that obtaining an income tax advantage in these circumstances was merely an effect of the transaction and not a main purpose.
Place of effective control for Treaty purposes
The Court of Appeal has provided guidance on the correct approach to the "place of effective control" test used in many tax treaties in Haworth v HMRC [2025] EWCA Civ 822. In particular, the decision confirms that "place of effective control" is not the same as "central management and control" and that it need not be approached on a "snapshot" basis. In this case, Mauritian trustees had been appointed for a limited period to play their part in a tax planning arrangements and, whilst they made genuine decisions to carry out the settlors' plan, this simply indicated that the place of effective, or realistic, control was elsewhere.
Revised tax treatment of carried interest: draft legislation
As part of this summer's "L Day", the government has published draft legislation for inclusion in the Finance Bill 2025-2026 to give effect to the new tax regime applicable to carried interest. The draft legislation runs to some 48 pages, and follows on from the recent publication of a consultation response document, which confirmed that the new regime would come into effect from April 2026. There is now a short technical consultation period on the draft legislation until 15 September.
The Enterprise Investment Scheme (EIS) requirements include a requirement that the relevant company (or group company) commences a "qualifying trade" within two years of the date that the relevant EIS shares are issued. This, and related trading requirements, have been considered in two recent cases, York SD Ltd v HMRC [2025] UKFTT 877 and Putney Power Ltd v HMRC [2024] UKFTT. In both cases, the FTT has held that the trading requirements were not met and provided important guidance on the commencement of a trade for tax purposes, concluding, in essence, that that a trade begins only when a business is "open for business", meaning it has assembled the necessary infrastructure and is ready to provide goods or services.
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