V@ update - April 2025

Welcome to the April 2025 edition of RPC's V@, our monthly update which provides news and analysis from the VAT world.

News

• The government has published its response to the Public Accounts Committee's recent report on tax evasion in the retail sector. The government has agreed to revise HMRC's estimate of the amount of tax lost from VAT evasion by online retailers on online marketplaces and strengthen VAT registration controls.
  
  The Treasury Minutes setting out the government's response can be viewed here.
  
  
• HMRC has published an internal manual on the VAT reverse charge for building and construction services. 
  
  HMRC's manual can be viewed here.
  
  
• HMRC has updated its guidance, notices and forms relating to VAT. The update includes links to guidance on appointing a tax agent and what to do if you cannot pay your tax bill on time. 
  
  HMRC's updated guidance can be viewed here.

Case reports

HMRC v Innovative Bites Ltd and another [2025] EWCA Civ 293

The Court of Appeal (CoA) considered whether giant marshmallows were confectionary and therefore standard-rated for VAT purposes.

Under section 30, Value Added Tax Act 1994 (VATA), a supply of goods is zero-rated for VAT purposes if the goods are "food of a kind for human consumption".

However, there is a list of excepted items which are standard-rated. Item 2 of that list is "Confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance". The list is followed by notes which expand on the items.  Note 5 provides: "for the purposes of item 2 of the excepted items 'confectionery' includes chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers".

Innovative Bites Ltd (IBL) argued that its product, Mega Marshmallows, was not confectionary within Item 2 because the marshmallows were designed to be roasted on a skewer over an open flame, rather than simply eaten out of the packet. The giant marshmallows were advertised on that basis and sold in the "world foods" or barbecue sections of supermarkets rather than their confectionary sections.

The First-tier Tribunal (FTT) agreed with IBL that consumers were more likely to roast the marshmallows than consume them as a snack without roasting and therefore they did not fall within the definition of confectionery in Item 2.

HMRC appealed to the Upper Tribunal (UT). It argued that Note 5 should be regarded as a deeming provision such that any "item of sweetened prepared food which is normally eaten with the fingers" is deemed to be confectionary. The UT dismissed HMRC's appeal as there was no material error of law in the FTT's analysis.

HMRC appealed to the CoA.

The CoA rejected the argument that Note 5 should be regarded as a deeming provision, but was of the view that the FTT had failed to give it sufficient weight. By including Note 5 in the legislation, Parliament had stated unambiguously that products of the type described in Note 5 are confectionary, for the purposes of Item 2. The CoA therefore remitted the matter back to the FTT to decide whether Mega Marshmallows are "sweetened prepared food which is normally eaten with the fingers". The answer to that question will determine the appeal.

Why it matters:

This case raises interesting questions of statutory interpretation that will have important implications for other taxpayers determining the VAT status of their products. It also emphasises the importance of the role of the FTT, even though the CoA expressed doubt about the factual findings made by the FTT, it felt obliged to remit the case back to the FTT rather than remake the FTT's decision.

The judgment can be viewed here.

HMRC v Bolt Services UK Ltd [2025] UKUT 00100 (TCC)

The UT addressed whether Bolt Services UK Ltd (BSUL) operated an on-demand ride-hailing service that qualified for the Tour Operators' Margin Scheme (TOMS) under UK VAT law (TOMS is a special VAT scheme applicable to tour operators and travel agents and allows VAT to be calculated on the margin between the amount received from the customer and the cost of services provided by third parties).

BSUL, a ride-hailing platform, provides on-demand private hire transport services via a smartphone app. Since August 2022, BSUL has operated as a principal, purchasing transport services from self-employed drivers and resupplying them to customers. BSUL applied the TOMS for VAT purposes.

In October 2022, BSUL sought a non-statutory ruling from HMRC regarding the VAT treatment of these services. HMRC concluded that BSUL's services did not fall within TOMS. BSUL appealed to the FTT.

HMRC argued that BSUL's services were not of a kind commonly provided by tour operators or travel agents and that the services were single, in-house supplies materially altered by BSUL.

The FTT allowed BSUL's appeal and HMRC appealed to the UT.

In determining the appeal, the UT considered whether BSUL's services are:

1. of a kind commonly provided by tour operators or travel agents; and
2. supplied without material alteration or further processing.

The UT dismissed HMRC's appeal. It agreed with the FTT that BSUL's on-demand ride-hailing services fall within TOMS for VAT purposes.

The UT concluded that:

• BSUL's services are akin to those provided by tour operators or travel agents, such as airport transfers, as they involve the resupply of travel services without significant alteration;
• the services provided by the drivers were not materially altered or further processed by BSUL, as it acted as an intermediary facilitating the transport services and the drivers' services directly benefited passengers; and
• accordingly, BSUL only liable for VAT on its profit margin and not in respect of the full fare.

Why it matters:

This decision has significant implications for the VAT treatment of similar ride-hailing services in the UK, who may seek similar VAT treatment under TOMS. Given the wider implications of the decision, it is likely that HMRC will seek to appeal the decision.  

The decision can be viewed here.

St Patrick's International College Ltd and Others v HMRC [2025] UKUT 101 (TCC)

The UT considered whether certain education services were exempt from VAT.

St Patrick's International College (and others) appealed HMRC's decision that their education services were not exempt from VAT to the FTT.

The dispute concerned the application of Group 6, Schedule 9, VATA, which provides exemptions for certain educational supplies. HMRC accepted that the appellants' English language tuition was exempt but argued that the exemption did not apply to other, unrelated educational services offered by the appellants. HMRC also rejected the application of the principle of fiscal neutrality - a concept that requires equal VAT treatment of similar supplies in order to avoid distorting competition and provide a level playing-field for suppliers. The appellants claimed their courses were materially similar to those offered by exempt universities and colleges.

The appellants also argued that student loans, if unpaid, should make the courses exempt under the rules for funds provided by the Secretary of State.

The FTT rejected these arguments and the appellants appealed to the UT.

The UT dismissed the appeals, confirming the FTT's decision that the education supplies in question were not exempt from VAT. The UT agreed with the FTT's interpretation of Group 6, Schedule 9, VATA, finding that none of the exemptions applied to the supplies in this case. The UT also rejected the claim that the principle of fiscal neutrality required equal treatment between taxable and exempt courses, noting that where exemptions are subject to supplier conditions, the typical consumer’s perspective is irrelevant. Furthermore, the UT confirmed that the VAT treatment of a supply must be determined at the time of supply and cannot be based on future events, such as the repayment of student loans.

Why it matters:

This decision is of relevance to education providers seeking VAT exemptions, as it clarifies the narrow scope of exemptions under VAT law, particularly where supplier conditions are involved. The case also provides an important insight into how the principle of fiscal neutrality applies to VAT exemptions and the legal framework for education services.

The decision can be viewed here.