VAT Insights - February 2026

The decision of the Supreme Court HMRC v Hotel La Tour Ltd [2025] UKSC 46 is an extremely important one in the context of recoverability of input VAT incurred in connection with share sales. Long ago (well 1995), Simmons & Simmons represented BLP in the landmark ECJ decision that restricted input VAT recovery in cases involving a "chain-breaking" exempt supply. However, since that decision, the ECJ had appeared to soften its stance and suggest that there were certainly situations where the ultimate purpose of a business would be a significant factor in determining input VAT recovery, calling into question the simple "chain-breaking" approach. The Supreme Court decision in Hotel La Tour attempts to reconcile those two approaches. In doing so, the decision brings the "chain-breaking" approach back to the forefront and, whilst recognising that there may be circumstances in which an intervening exempt supply (such as a sale of shares) may not result in irrecoverable input VAT, does little to shed light on what those circumstances might be.

In this edition, as well as looking at the Supreme Court decision in Hotel La Tour, we also cover the following developments:

• Another AG Opinion involving the interaction of transfer pricing adjustments and VAT, taking a different approach to the recent Arcomet Towercranes case
• An FTT decision demonstrating the scope of the "economic and commercial reality" approach to ignore contractual terms in analysing arrangement for VAT purposes
• An application of the Levob approach to a supply of mixed services and goods in the production of bespoke family history books
• Revenue and Customs Brief 1 (2026) announcement of the removal of the linked goods concession.

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.

We are also pleased to announce that the Indirect Tax team is expanding with the arrival of Karen Bannister, who brings valuable experience from working with several leading financial services institutions. We are very pleased to welcome Karen to the team and look forward to the experience and insight she will bring.

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 (Part 2)

Determining the correct transfer price is a less a matter of law and more a "matter of faith" according to AG Kokott in Stellantis Portugal SA v Autoridade Tributaria e Aduaneira (Case C-603/24), contrasting this with the position under VAT law in the latest referral to tackle the interaction of VAT and transfer pricing.

In SC Arcomet Towercranes SRL (Case C-726/23), the CJEU recently held that payments made between related entities for transfer pricing purposes amounted to consideration for taxable supplies. Even though the payments in that case were made to satisfy OECD transfer pricing requirements, they nevertheless amounted to consideration for VAT purposes for services that the related party had agreed to provide to the entity making the adjustment payments under the terms of a clear contractual arrangement between those parties

In Stellantis Portugal SA v Autoridade Tributaria e Aduaneira (Case C-603/24) AG Kokott has adopted a somewhat different approach, suggesting that it is entirely possible and even necessary to give a principled answer to the question of the consequences under VAT law of a transfer pricing adjustment to ensure that the situation "does not necessarily have to be decided afresh, on a case-by-case basis, each time". Though whether the CJEU will take up the invitation to broaden its decision beyond the specific facts seems unlikely. In this case, in contrast to SC Arcomet Towercranes, the AG concludes that the payments made were a simple downward adjustment to the price previously paid by the recipient for supplies of goods from the payer.

This highlights the importance of contractual arrangements and TP documentation in determining the VAT treatment of TP adjustments. The contractual terms can influence whether an adjustment is consideration for a supply, an adjustment to an earlier supply, or outside the scope of VAT altogether. All parties involved in the design of the operating model and preparation of intragroup agreements need to be mindful of these distinctions, given the VAT implications.

Read our Insights article in full

Economic and commercial reality prevails

We have perhaps become accustomed to the well-worn trope that the contractual terms must, in appropriate circumstances, stand aside for the economic and commercial reality of the arrangements to determine the VAT treatment. However, it can still come as something of a surprise when the Tribunals choose to (in essence) rip up the contract on the basis that it really does not determine the true arrangement between the parties. That is what happened in D Nuttall UK Ltd v HMRC [2025] UKFTT 1600. The FTT considered that contractual arrangements for transport services were actually, in effect, for the hire of vehicles. To the great fortune of the taxpayer, this meant that it could recover the input VAT on repairs and fuel it incurred, rather than such payments amounting to third party consideration in relation to supplies made to the vehicle owner. Perhaps one might even find some degree of sympathy here for HMRC who (based on the contractual terms) were quite right to restrict the input VAT recovery!

See our Insights article here

Single supply of zero-rated book

The application of the single supply analysis is often a matter of impression as much as it is of law. In the latest case, the FTT in HMRC v Story Terrace Ltd [2025] UKFTT 01554 considered the supply of bespoke books provided by the taxpayer to individuals who wished to have personal family histories recorded for posterity. The process involved interviewing customers, allocating them to a ghost writer to help put together the stories and finally editing the stories together with photographs into a book format. The taxpayer contended that its supplies were of zero-rated books, whereas HMRC argued that the predominant element of the supply was standard rated ghost writing services.

Applying the Levob (Case C-41/04) approach, the FTT considered that the various elements provided by the taxpayer were so closely linked that they formed objectively, from an economic point of view, a single transaction which it would be artificial to split. Accordingly, the question was whether the ghost writing or the physical book was the predominant element for the purposes of categorising the supply. The FTT considered that HMRC's argument involved a dissection of the taxpayer's supply in the way warned against by the Court of Appeal in Gray & Farrar International LLP v HMRC [2023] EWCA Civ 121. Instead, applying the correct approach by asking what is the predominant element in what the typical consumer thinks he or she is acquiring, the typical consumer would regard the provision of the book as qualitatively the most important aspect of the supply.

Read the FTT decision in full here

Removal of linked goods concession

HMRC has published Revenue and Customs Brief 1 (2026) announcing the withdrawal of the linked goods concession. The Extra Statutory Concession previously described in paragraph 3.7 of Notice 48 applied to minor promotional items supplied in linked supplies schemes but has been withdrawn on the basis that it is no longer needed.

HMRC considers that the supplies previously eligible to be treated as single supplies under the concession should be treated as single supplies under the normal VAT single supply rules. The withdrawal of the concession is not intended to introduce new compliance obligations or change the VAT treatment of such supplies. As before, HMRC will treat most small value supplies, which might otherwise be considered distinct and independent, as forming part of a single supply. Businesses are now referred to HMRC's policy described in VATSC11113..

Read R&C Brief 1 (2026) here

Other issues we have recently covered

Updated transfer pricing guidance for compliance

In September 2024, HMRC published guidelines on common risks in transfer pricing compliance (GfC7) as part of its Guidelines for Compliance series. The guidelines contain a lengthy analysis of areas of risk and what HMRC sees as best practice for compliance and policy design in this area. Most recently, HMRC have updated the guidelines, adding two new substantive sections on value chain analysis and offshore procurement hubs. These are important new sections and should be required reading for affected businesses in indicating HMRC's expected benchmark for compliant transfer pricing policies, documentation and activities going forwards.

Registration of tax advisers with HMRC

Draft legislation has been introduced in the Finance (No 2) Bill to require tax advisers to register with HMRC and meet certain minimum standards in order to interact with HMRC from May 2026. Importantly, the definition of "tax adviser" for the purposes of these new rules is widely drawn and will impact not just tax advisers in traditional law firms and accountancy practices, but also in-house tax (and other) teams which interact with HMRC. Despite HMRC's assurance that the impact on businesses should be negligible, these new requirements will add significant new administrative burdens on a wide-range of businesses that would not normally see themselves as "tax advisers". All businesses with any in-house function (or even dealing with HMRC on run of the mill tax filings (such as PAYE returns) may be brought within scope where their activities involve any form of interaction with HMRC on behalf of others. The rules will also apply to non-UK tax advisers. The consequences of failing to comply may be significant, including significant penalties on both the tax adviser organisation and individuals within that organisation.

Complex statutory construction: Tower One

The Court of Appeal has upheld HMRC's assessment for SDLT in The Tower One St George Wharf Ltd v HMRC [2025] EWCA 1588 on the basis that the anti-avoidance provision in section 75A could be applied to the arrangements involving inserted steps to obtain a corporation tax advantage. As we point out in our recent Tax Journal article, the Court's decision is a clear statement of the courts' willingness to apply anti-avoidance provisions purposively in the SDLT context. The main purpose test for group relief is not easily circumvented, and the market value rule and s.75A provide HMRC with powerful tools to counteract tax-motivated arrangements. Taxpayers and advisers should take heed: the days of "mainly ignored" anti-avoidance rules in SDLT may be well and truly over.

Capital interests under LLP agreement taxed as income

The Upper Tribunal has rejected the taxpayer's appeal against the decision of the FTT regarding the tax treatment of "capital interests" issued to members of a UK LLP: The Boston Consulting Group UK LLP v HMRC [2026] UKUT 25. Indeed, the UT decision goes further in finding that the proceeds from those capital interests also fell within the scope of the mixed member partnership rules for tax purposes.

Transfer pricing, PE and DPT consultation outcome

As part of the November 2025 Budget, HMRC published its consultation outcome on reforms of transfer pricing, permanent establishment (PE) and diverted profits tax (DPT). The consultation response confirms that the proposed reforms will come into force broadly as originally proposed with effect from 1 April 2026. However, a number of changes to the detail have been accepted and legislation now included in the Finance Bill 2025/26. Perhaps most surprising was the lack of any announcement on the extension of transfer pricing to medium sized companies, which will not form part of the reforms. The UK government has also introduced the International Controlled Transactions Schedule (ICTS), an annual filing requirement to support HMRC's automated risk assessments and expected to take effect for accounting periods beginning on or after 1 January 2027.

Pillar Two side-by-side arrangements

The OECD has published an important document providing for the approval of a "side-by-side system" for applying the Pillar Two rules, as well as containing details of a series of simplification measures. It is expected that the side-by-side arrangement will largely exclude US parented companies from the impact of the Pillar Two top-up tax provisions without the US implementing the Pillar Two measures itself.

CIS: consultation on administrative changes

HMRC has published a technical consultation on proposed amendments to the construction industry scheme (CIS). The first change involves enacting into law an existing extra statutory concession concerning payments made to public bodies, such as local authorities. The second change involves reinstating a requirement for nil returns by contractors, as it appears that the lack of any returns has, in practice, led to the issue of erroneous late filing penalties.

Tax penalties for carelessness or deliberate inaccuracies

The Upper Tribunal has provided significant clarification on the application of penalties for inaccurate tax returns under Schedule 24 of the Finance Act 2007, including the meaning of "carelessness", the causation test, and the threshold for "deliberate inaccuracy", in its decision in Delphi Derivatives Limited v HMRC [2026] UKUT 00021.

Free movement of capital and administrative burdens

The CJEU has held that the requirement for an overseas pension fund to present a certificate from its local authorities containing specified information about its pension fund status and tax residence in order to obtain a refund of withholding tax on dividends paid by a Portuguese company were in breach of the fundamental freedom of movement of capital: Santander Renta Variable Espana Pensiones v Autoridade Tributaria e Aduaneira (Case C-525/240). A strict requirement based only on the presentation of a certified declaration was disproportionate and could not be justified. Non-resident taxpayers must be allowed to put forward other forms of proof that they qualify for the exemption, since such information could ultimately be checked by the Portuguese tax authorities under mutual assistance mechanisms that exist between Member States.