VAT Insights - February 2026

Distinguishing between a non-taxable payment for “credits” to be used on future supplies and a taxable supply of entitlements or access is far from easy. The question was addressed in the FTT in 2024 in two cases, Lycamobile and Go City. Lycamobile has now returned to the Upper Tribunal where the Tribunal agreed with the FTT that, in that case, customers were paying for access to a network and not a specific amount of credits. These cases are important as the correct determination of the supply will impact both the time and scale of the supply. In particular, if there is no immediate supply (because what is supplied is simply in the nature of a “currency” to acquire the “real” object of the supply) then there will be no supply at all to the extent that that “currency” (or credits or points) are not actually used. This is clearly not a result that HMRC will readily accept, however, seeing their inability to charge VAT on the full amounts paid by a customer as distortative and contrary to the general principles of VAT.

In this edition, as well as looking at the Upper Tribunal decision in Lycamobile, we also cover the following developments:

• A CJEU decision that highlights the breadth of the concepts of “consideration” and “legal relationship” when determining if there is a supply
• An example of the application of the anti-avoidance rules disapplying the option to tax
• A rare example of ignorance of the law being a reasonable excuse for failure to account for VAT correctly; and
• An EU Parliament draft report calling on the EU Commission to bring forward new proposals for modernising the exemption for financial transactions.

Also in this edition, you can hear our latest podcast episode, where Jo Crookshank and Kapisha Vyas discuss the relationship between transfer pricing adjustments and VAT, focusing on two recent CJEU cases: SC Arcomet Towercranes and Stellantis Portugal.

We also 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 treatment of telecom plan bundles

The Upper Tribunal in Lycamobile UK Ltd v HMRC [2026] UKUT 74 highlights that the ability to take advantage of the concept of a purchase of "allowances" or "credits" being outside the scope of VAT, such that VAT is only chargeable on the actual usage of those credits to acquire services, is entirely fact dependent. The UT held that a payment for a telecom plan was subject to VAT in full when paid and did not amount either to payment for a multi-purpose voucher or non-taxable payment for credits. The UT agreed with the FTT that, in this case, the acquisition of the entitlement to allowances under Plan Bundles was an end in itself for customers and, as such, was the true subject of the supply.

The UT noted that whilst it is possible to have a supply consisting of a sale of some type of "currency" as a preliminary step in allowing access to goods or services, such cases turn entirely on their facts and it is also clearly possible, and more common, to have a supply consisting of providing availability/access. In this case, the FTT was entitled to find on the facts that what customers were contracting for in buying a plan was guaranteed availability, at a fixed price, for a fixed period. Indeed, although the FTT did not rely on the fact, the UT considered that the fact that only 5 to 10% of allowances were actually used was, at the very least, consistent with that conclusion.

Read our Insights article here

Statutory charges for illegal broadcasts subject to VAT

The CJEU in Credidam v Cristian General Serv (Case T-643/24) has held that statutory payments required to be made by a hotel in respect of broadcasting audiovisual programmes without a licence were, in principle, subject to VAT. The Court adopted a broad approach to both the meaning of consideration, legal relationship and reciprocity in relation to payments that might outwardly look like penalties, fines or compensation, but were part of a statutory scheme designed to compensate for the use of copyrighted materials and encourage compliance.

The decision of the Court draws heavily on the Apcoa Parking case (Case C-90/20) in holding that mere use of a service may give rise to the necessary legal relationship. Equally, the fact that the hotel did not have a licence in advance did not prevent there being the necessary direct link between payment and service. The Court stressed that the principle of fiscal neutrality “precludes, in relation to the collection of VAT, a generalised distinction between unlawful and lawful transactions” and, in any event, the domestic legislation governing communication to the public in a situation where no licence existed provided the necessary direct link.

See the CJEU decision here

Option to tax anti-avoidance rules

The anti-avoidance rules in VATA 1994 Sch 10 para 12 are notoriously difficult. They disapply the option to tax where, in broad terms, a developer of land or a development financier expects or intends the land to be used for exempt purposes by a person connected to the developer or development financier. In Nissi N Nissi Ltd v HMRC [2026] UKFTT 234, the FTT has upheld the use of this anti-avoidance provision and rejected the argument that a de minimis amount is necessary before its application.

The case concerned a building company which developed a property for a children’s nursery. It appears that both companies were owned by the same people and that it was always the intention that the nursery (which wasn’t VAT registered as it made only exempt supplies) should occupy the premises. It appears that at least £22,500 (but in likelihood significantly more) of the total purchase price of the property of £854,000 was provided by the nursery and the FTT has accepted that this was sufficient to trigger the anti-avoidance provision. As such, the option to tax was disapplied and the input VAT recovery claim by the appellant on the purchase rejected. The FTT rejected the appellant’s argument that there was any exclusion in the legislation for de minimis amounts and, in any event, that £22,500 was de minimis in this context. Quantum is simply a fact relevant to determining the parties intentions and expectations for the purposes of applying the tests in the legislation.

Read the FTT decision in full here

Ignorance of the law is no excuse?

Julian v HMRC [2026] UKFTT 159 is a rare example of where the well-known maxim did not apply. It concerned a family farming business in the Scilly Isles where the taxpayers had accounted for VAT under the agricultural flat rate scheme. The scheme was withdrawn in 2021 for businesses which exceeded a threshold. The taxpayers were caught by this change, but as they were unaware failed to register for VAT in 2021. It was not until 2023 when their accountant discovered the change that they regularised their affairs. HMRC sought to levy a penalty on the taxpayers for their failure to register. The taxpayers resisted the penalty on the grounds that they had a reasonable excuse for not registering, since they were unaware of the change to the scheme which they had been using for over 25 years and HMRC had not informed them of the change.

Whilst the tribunal accepted HMRC’s argument that they were not required to inform every taxpayer of changes which might affect them, in these particular circumstances, given the way in which the changes were announced, it was objectively reasonable for the taxpayers not to be aware of them. “The changes to the AFRS were not contained in the Finance Bill or Act nor, so far as we can see, were they the subject of a separate announcement. The intention to change the rules was mentioned in a brief paragraph buried within the OOTLAR, a 67-page document published online at the time of the Budget, along with a further 43 pages of Annexes. The changes themselves were effected by Regulation… It is entirely reasonable that an ordinary taxpayer should be unaware of this publication and it is also reasonable that a generalist accountant in a small firm should be equally unaware of it”. As such, the taxpayers did have a reasonable excuse for their failure to register.

Read the FTT decision here

EU Parliament report on taxation of financial services

The VAT treatment of financial services has long been a difficult issue for legislators within the EU, with a number of recent attempts at reform falling by the wayside. The latest attempt to reignite debate and modernisation has been launched by the European Parliament's Committee on Economic and Monetary Affairs (ECON) with the publication of a draft report calling for a review of the taxation of the financial sector and, in particular, the VAT exemption for financial services. Lack of reform has left the VAT Directives out-of-date, lacking any specific provisions dealing with new and innovative financial instruments such as crypto-assets, decentralised finance and fintech, leading to divergent national interpretations of the VAT rules and a lack of legal certainty for the industry. This has led to a "complex, fragmented and incoherent tax landscape, making tax compliance costly and increasing firms' operating expenses". There is, therefore, a need for clear VAT definitions and simplified rules to reduce these compliance burdens.

The Report also suggests that the existing exemption is no longer fit for purpose, particularly where there are clearly identifiable financial charges such as fees and commissions and calls on the Commission to publish a proposal to reform the VAT rules for the financial sector in a way that mitigates costs for retail consumers and ensures the financial sector makes a fair contribution.

Read our full Insights article here

Other issues we have recently covered

Spring statement 2026: the art of saying nothing very loudly
Our economic analysis of the Spring Statement delivered by the Chancellor on 3 March 2026.

EU list of non-cooperative jurisdictions for tax purposes updated
On 17 February 2026, the EU Commission announced further changes to the EU list of non-cooperative jurisdictions for tax purposes, adding Turks and Caicos Islands and Vietnam and removing Fiji, Samoa and Trinidad and Tobago from the list of non-cooperative jurisdictions. The "black" list (Annex I) now contains ten jurisdictions, American Samoa, Anguilla, Guam, Palau, Panama, the Russian Federation, Turks and Caicos Islands, the US Virgin Islands, Vanuatu and Vietnam.

Loan relationships and imported losses
The Upper Tribunal has in part allowed the taxpayer’s appeal in UK Care No. 1 Ltd v HMRC [2026] UKUT 90 concerning the extent to which losses on loan notes were referable to the period when the taxpayer was not UK resident and, as such, disallowed. The UT agreed with the FTT that the “compensatory” part of the loss attributable to the increase in market value of the loans was referable to the period before the company became UK tax resident. However, unamortised costs and discount which had been spread across the life of the loans and became payable on early redemption was not referable to the pre-migration period simply because those amounts were paid / arose on issue. Spreading those costs / discount over the life of the loan was in line with commercial reality such that the loss referable to those amounts was not a pre-migration loss.

Deferred remuneration and treaty residence
HMRC has published new guidance on the tax treatment of deferred remuneration, such as bonuses and long-term incentive payments, under the terms of employment income articles based on Article 15 of the OECD Model Tax Treaty. The guidance, contained in its International Manual at INTM163155, confirms that when considering treaty residence for the purpose of applying the article, it is the individual's treaty residence when the payment is made that determines the application of the provision.

Over-arching employment contracts and deductible expenses
The Court of Appeal has dismissed the taxpayer's appeal in Mainpay Ltd v HMRC [2025] EWCA 1290, holding that the umbrella company employment arrangements in this case did not amount to a single, continuous employment contract and, therefore, subsistence and travel expenses paid by the taxpayer to employees when on individual assignments were not deductible expenses which could be paid free of PAYE and NICs.