VAT Insights - October 2025

How do you reconcile the application of two deeming provisions within the VAT legislation when there is no explicit order of priority? That is essentially the problem that has faced the courts in Prudential Insurance Company Ltd v HMRC when deciding if a performance fee from a taxpayer to the representative member of its VAT group was subject to VAT when payment was delayed until after it had left the VAT group. Transactions within a VAT group are deemed not to give rise to supplies, but on the other hand the time of supply rules deems the supply to be made when payment was made. Which takes priority?

The difficulty of reconciling this "chicken and egg" problem is demonstrated by the fact that the FTT held in favour of the taxpayer in deciding that the VAT grouping rules should be first applied to the "real supply", the UT reversed that decision and the Court of Appeal only upheld the decision of the UT by a majority of two to one. However, the Supreme Court has now unanimously approved the approach of the Court of Appeal..

In this edition as well as looking at the Prudential decision, we also cover the following developments:

• A successful judicial review application against HMRC's refusal to allow the use of alternative evidence of input VAT entitlement
• An AG opinion on the correct VAT treatment of sales of in-game virtual currencies
• Another vouchers case where the AG has addressed the issue of unused multi-use vouchers
• The AG opinion that Germany was entitled to restrict the application of the singe supply rule in the context of the reduced rate applicable to hotel accommodation
• An opinion that a statutory obligation to have certain equipment in place did not automatically mean that input VAT on such equipment was automatically attributable to the whole of the business
• Lessons from recent Irish VAT cases on the right of taxpayers to register for VAT in Ireland; and
• Spanish domestic cases on the application of the TOGC rules (and Transfer Taxes) to sales of hotels and hotel real estate.

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.

Intra-group services and the time of supply rules

In The Prudential Insurance Company Ltd v HMRC [2025] UKSC 34, the Supreme Court was faced with the correct VAT treatment of a contingent performance-based fee from a business to the representative member of its VAT group when the criteria triggering the fee was not fulfilled until a point significantly after it had left the VAT group and considerably after the cessation of services in a real-world context. No VAT was charged on these payments as Prudential took the view that the performance fees were consideration for the services rendered to it at a time when they were members of the same VAT group. HMRC, in contrast, pointed to the fact that services represented a continuous supply of services under Regulation 90 of the VAT Regulations such that the relevant tax point was when Prudential was invoiced, at which time they were no longer members of the same VAT group. Which approach took priority?

The decision of the Court of Appeal in BJ Rice, where the taxpayer made supplies falling within the equivalent time of supply rules before it was registered for VAT but did not get paid until after it was registered, suggested that the VAT liability of the supplies should be determined before the time of supply rules are applied. The Supreme Court has, however, held that the BJ Rice approach should be restricted to its facts. The later decisions in Thorn Materials and Svenska made it clear that, in the context of the VAT grouping rules, the time of supply rules should first be applied to determine whether the VAT grouping rules are in point. Accordingly, the Court agreed with the UT and Court of Appeal that the time of supply of the services remunerated by the deferred performance fee were after the business had left the VAT group, and the supplies were consequently subject to VAT.

Read our Insights article here

Input VAT recovery in the absence of VAT invoices

It is relatively rare for the courts to uphold judicial review applications against HMRC, but the recent case of R (on the application of Hotelbeds UK Ltd) v HMRC [2025] EWHC 2312 is such a case. It also concerns the important topic of input VAT recovery in the absence of VAT invoices. In this case, HMRC had rejected the taxpayer's claim to rely on alternative evidence without proper consideration and on the basis of HMRC guidance which the Court criticised as inconsistent and ambiguous and, in any event, not directly applicable to the facts of this case.

Ultimately, the decision emphasises the importance of the principle of neutrality in the VAT system, which encompasses a taxpayer's right to recover input VAT connected to taxable outputs. Whilst the right to recover input VAT automatically depends on the existence of a valid VAT invoice, it is not the case that without an invoice there is no right at all. That is the purpose of HMRC's discretion to allow input VAT claims in the absence of a valid VAT invoice and that discretion must be exercised in a way that is reasonable in all the circumstances

Read our Insights article in full

VAT treatment of in-game currencies

The VAT treatment of transactions in the virtual world of games (and the like) throws up some very interesting questions. The AG's opinion does not deal directly with virtual transactions, but with real world transactions in virtual currencies bought and resold at a profit by a person. Unsurprisingly, the AG has opined that transactions in an in-game currency do not fall within the exemption in Article 135(1)(e) of the Principal VAT Directive for currency transactions.

However, the AG has suggested that a teleological approach should be adopted to the second-hand goods margin scheme to allow such transactions (not involving goos) to be taxed only on their margin where the resales of such in-game currencies take place on essentially comparable terms to those of second-hand goods: Žaidimų valiuta' MB v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Case C‑472/24). The teleological approach taking into account unforeseen technical developments put forward by the AG in this case might be contrasted to the similar scenario previously considered by the CJEU in relation to digital books (where the Court restricted the application of reduced rates to physical books). As such, it remains uncertain what approach the CJEU might adopt in relation to the application of the margin scheme.

Read our full Insights article here

VAT, vouchers and loyalty points

As we've noted a number of times in VAT Insights, applying the VAT voucher rules can be extremely difficult in practice. Skatteverket v Lyko Operations AB (Case C 436/24) deals with a scheme providing loyalty points on purchases which could be redeemed to acquire further items from the supplier. The opinion of the AG that these did not amount to multi-use vouchers is another which exposes the very real difficulties in applying the VAT rules in this area, requiring a degree of creativity from the AG to reach the "right" verdict.

In particular, the AG's opinion addresses head-on the question of the VAT treatment of unused vouchers. Several recent cases have relied on the existence of multi-use vouchers (where the consideration is not brought into account until points are redeemed) to argue that consideration attributable to unused vouchers falls outside the scope of the VAT system. However, the AG in this case argues that such a result will only arise where the value of the multi-use voucher is specified from the outset. Where it is merely "specifiable", then the consideration does not fall to be ignored until the voucher is redeemed.

Read our Insights article here

Excluding the single supply rule

The single supply rule is, of course, one of the best known principles in VAT law. It does, however, have its limits. In particular, the existing case law of the CJEU in the French Undertakers case and Talacre Beach makes it clear that it is possible to limit the application of a single rate of VAT to a composite supply, but only where there are "concrete and specific aspects" of a supply for which domestic legislation has provided a particular VAT treatment. It is, therefore, not surprising that the AG in J-GmbH v Finanzamt K and others (Joined Cases C‑409/24 to C‑411/24) has opined that German VAT rules which limited the reduced rate of VAT for short-term accommodation by excluding other ancillary aspects of such supplies was not contrary to EU law.

However, there are other surprising aspects to the opinion. The distinction drawn with the Stadion Amsterdam case seems unnecessary (and quite possibly incorrect). The better distinction in that case was that the Dutch legislation simply did not seek to limit the reduced rate to a concrete and specific aspect of the single supply. In addition, the AG's preliminary remarks that it was questionable whether some of the services in these cases amounted to taxable transactions at all on the basis that they were provided, in many cases, free of charge seems, itself, questionable. Certainly in the context of promotional supplies of goods, both the UK courts and the CJEU have held that items provided "free" were not in reality provided for no consideration for VAT purposes. Whether, therefore, free access to a gym or free parking, breakfast or wi-fi should automatically be treated as provided for no consideration in the context of paid hotel accommodation is, at the very least, an interesting question.

Read the full Insights article here

Attribution of input VAT and general overheads

The attribution of input VAT to particular outputs is an endless source of dispute. In particular, whether inputs should be specifically attributed to particular supplies or treated as a general overhead of the business and attributable to the business as a whole can be a difficult issue. In Oblastní nemocnice Kolín, a. s., nemocnice Středočeského kraje v Odvolací finanční ředitelství (Case C‑513/24) the taxpayer argued that the existence of a statutory requirement to have in place certain equipment to carry on a healthcare business necessarily meant that expenditure on that equipment should be attributed to the business carried on as a whole, including additional taxable services provided by the business which themselves depended on the existence of the (largely exempt) healthcare business.

The AG has rejected that argument, which ultimately amounted to an insufficient "but for" approach to input VAT attribution. It is simply not sufficient to argue that the relevant activities could not have been provided "but for" the relevant expenditure. The "direct and immediate" test of input VAT attribution requires a much closer nexus between expenditure and use, such that even a statutory requirement to have in place certain equipment to carry out healthcare services on which the additional services depended was an insufficient link.

Read our full Insights article here

VAT Registration in Ireland: Lessons from recent cases

Recent decisions by the Irish Tax Appeals Commission (TAC) (the Irish equivalent of the UK's First-Tier Tribunal Tax Tribunal) highlight the challenges faced by businesses seeking VAT registration in Ireland. Two 2025 decisions, in particular, underscore the importance of providing robust evidence of economic activity and taxable supplies within Ireland to qualify as an "accountable person" under the Value Added Tax Consolidation Act 2010 (VATCA 2010).

The TAC emphasised that businesses must provide clear, objective evidence of economic activity and taxable supplies within Ireland. Simply being incorporated in Ireland or having a registered address is not enough to qualify as an "accountable person". However, by proactively addressing the requirements and providing clear evidence of economic activity, taxpayers can improve their chances of securing VAT registration and avoid unnecessary delays or refusals.

Read the full Insights article here

Spanish High Court rules on VAT treatment of real estate and hotel operations

The High Court of Justice of the Balearic Islands has issued a landmark ruling addressing the VAT implications of real estate transactions linked to hotel operations. The court determined that the sale of two urban properties constituting a hotel complex was subject to VAT, rejecting the tax authorities' argument that the transaction involved the transfer of an autonomous economic unit of the transferor, which would have made it subject to Transfer Tax (and therefore having a significant final cost for the acquirer).

The Balearic Islands Tax Agency argued that the sale of the properties implicitly included the transfer of the hotel business, as the properties were essential to its operation. However, the court concluded that the hotel operation, including licences, equipment, and the transfer of employees, had been previously transferred between two different lessees before the sale of the properties. This separation of the property and the business means transactions was key to the court's conclusion that the sale of the properties did not constitute the transfer of an autonomous economic unit. Furthermore, the fact that the lessees were related parties to both the seller and the purchaser of the properties did not preclude the existence of two distinct transactions (i.e. the business and the property).

This ruling provides critical guidance for structuring real estate transactions, particularly in the hotel sector. It underscores the importance of clearly documenting the separation between property sales and the transfer of operations. The court emphasised that, for a transaction to qualify as the transfer of an autonomous economic unit outside the scope of VAT (but subject to Transfer Tax), it must include all elements necessary for the continuity of the business activity. In this case, the lack of evidence linking the tourism licences to the sale of the properties further supported the court's decision to treat the transaction as subject to VAT.

The decision, although still potentially subject to appeal to the Supreme Court, reinforces the principle that the mere sale of real estate, without the organisational structure of a business, falls within the scope of VAT (and outside the scope of Transfer Tax). While the Spanish courts appear to be setting boundaries on Transfer Taxes assessed by regional tax authorities in Spain, this issue remains open to debate. It will be crucial for businesses involved in similar transactions to ensure that their property sale arrangements clearly reflect this separation to avoid disputes over tax treatment.

Other issues we have recently covered

Carried Interest Reform: Simmons responds to draft legislation

Simmons & Simmons has submitted its response to the HMRC consultation on the draft legislation for reform of the carried interest rules. We note that a number of aspects of the proposed regime, as set out in the draft legislation released, appear more workable than the original proposals, but have identified areas where further clarification or amendment would improve the regime's effectiveness and fairness.

Tax treatment of cryptoasset Exchange Traded Notes

HMRC has clarified the tax treatment of cryptoasset Exchange Traded Notes (crypto ETNs) following changes to Financial Conduct Authority (FCA) rules from 8 October 2025, which now allow retail investors to access these products. The new policy confirms that crypto ETNs may be held within pension funds and ISAs going forwards, subject, however, to some potentially significant restrictions.

Lexology Panoramic: Credit Funds 2025

We are pleased to have contributed to the Italy, Ireland, Netherlands, and Singapore chapters of Lexology Panoramic: Credit Funds 2025.