VAT update April 2026

Welcome to the April 2026 edition of RPC's VAT update, your monthly source for news and insightful analysis from the world of VAT.

News

HMRC issues guidance on the VAT place of supply rules

HMRC has issued guidance for VAT registered businesses in the oil and gas sector, explaining the recommended approach to deciding the place of supply of services in this sector. The guidance may also be useful for businesses operating in wind, carbon capture and storage sectors.

HMRC's guidance can be viewed here.

HMRC publishes guidance on informing it of an option to tax on property as part of cancelling VAT registration

HMRC has introduced a new tool which can be used to inform it about an option to tax on land and buildings as part of cancelling VAT registration. The information must be provided if HMRC has previously been informed that a taxpayer has opted to charge VAT on land or buildings and includes circumstances where options to tax have previously been excluded or disapplied.

HMRC's guidance can be viewed here. 

HMRC updates its guidance on how VAT affects charities

VAT Notice 701/1, which explains what a charity is, how VAT affects charities, how to treat a charity's income for VAT and what VAT reliefs a charity can get on what it buys, has been updated. Section 5.5.5 explains that from 1 April 2026, provided certain conditions are satisfied, businesses have not had to account for VAT when they donate goods to a charity for: (1) onward donation to an individual, another charity or organisation; or (2) use in the charity's non-business activities.

The updated guidance can be viewed here.

Case reports

FTT rules that HMRC was correct to disapply option to tax election

In Nissi N Nissi Ltd v HMRC [2026] UKFTT 234 (TC), the First‑tier Tribunal (FTT) dismissed the appellant's appeal against VAT assessments in the sum of £606,164.

The appellant acquired and developed a childcare nursery (the Property). HMRC argued that the appellant was not entitled to recover any of the input tax claimed in relation to the Property.

The default position is that the supply of land was exempt for VAT purposes under Schedule 9, Value Added Tax Act 1994 (VATA). However, the appellant acquired and developed the Property to be operated by Smart Start Nursery (SSN) and opted to tax the Property with the intended effect that the supply of the opted land would be treated as a taxable supply. The appellant then reclaimed input tax of £854,400. Its VAT returns showed no taxable outputs. HMRC issued assessments on the basis that the conditions to treat the opted land as a taxable supply were not met, and the option to tax was disapplied under the anti-avoidance rules contained in paragraph 12, Schedule 10, VATA (the "exempt land" anti‑avoidance provisions) because SSN was a "development financier" and a "relevant person".

The appellant argued that SSN’s partial funding did not bring it within the definition of "development financier" under paragraph 14(2)(a), Schedule 10, VATA and that a de minimis threshold should be implied into the legislation. HMRC contended that as SSN was an exempt childcare provider funding part of the project and intending to occupy the Property for exempt nursery use, it met the conditions to be treated as a "development financier" and "relevant person", for the purposes of paragraph 12, Schedule 10, VATA, and therefore the land was "exempt land", for the purposes of paragraph 12(2).

The FTT dismissed the appeal, confirming that no de minimis threshold could be implied into the definition of "development financier" and HMRC’s assessments were therefore valid. On the facts, the conditions in paragraph 12 of Schedule 10 were satisfied, the option to tax was disapplied, and the appellant was not entitled to recover the input tax it had claimed.

The decision can be viewed here.

Why it matters

The decision demonstrates that the anti-avoidance rules in paragraph 12, Schedule 10, VATA 1994, can apply to relatively small‑scale development arrangements where the statutory conditions are met, and that no de minimis threshold applies when considering the legislation. Even partial funding linked to an exempt occupier can bring that occupier within the regime, disapply an option to tax and result in denial of input tax recovery.

UT rules on Article 90 VAT adjustment and the CJEU's "direct link" requirement

In HMRC v Boehringer Ingelheim Ltd [2026] UKUT 135 (TCC), the Upper Tribunal (UT) considered whether the supplies made by Boehringer Ingelheim Ltd (BIL) to the Department of Health and Social Care (DHSC) of pharmaceutical products, and the payments it made under two voluntary pricing schemes to the DHSC, represented a rebate for VAT purposes.

BIL directly supplied pharmaceutical products for use to hospitals and pharmacies or via wholesalers. These supplies were standard rated for VAT. Between 2014 and 2020, BIL made payments to the DHSC under two voluntary pricing schemes. It claimed these represented price rebates for VAT purposes reducing the consideration for its taxable supplies, giving rise to a right to adjust the taxable amount under Article 90(1) of Council Directive 2006/112/EC. HMRC argued that the payments made by BIL to DHSC did not represent price reductions for VAT purposes but instead were levies on overall revenue and DHSC's role was to provide funding for the NHS which meant it was not the final consumer in relation to any of the supplies concerned.

The FTT agreed with BIL and allowed its claims to recover overpaid output tax on supplies of pharmaceuticals in respect of which it was held there had been a post supply rebate.

HMRC appealed to the UT which found that the FTT had misapplied the Court of Justice of the European Union’s "direct link" test. The UT found that payments BIL made to DHSC in relation to specific supplies that BIL made directly to DHSC represented a price reduction for VAT purposes, but other payments were made outside the supply chain and therefore did not reduce the consideration of any specific supply and therefore did not amount to a price reduction for VAT purposes. The UT emphasised that a reduction in the taxable amount requires a direct and identifiable link between the payment and specific taxable supplies, a relationship of reciprocal performance and payment to the final consumer.

The UT therefore allowed HMRC's appeal and remade the FTT’s decision so that BIL could not adjust the taxable amount of its supplies to wholesalers or pharmacies, save in relation to payments made in respect of vaccines and other medicines, which had been supplied directly to the DHSC.

The decision can be viewed here.

Why it matters

This decision confirms the conditions that must be satisfied for a payment to represent a priced rebate for VAT purposes and is of potential relevance to any business seeking to make VAT claims in relation to payments that represent a rebate for VAT purposes.

Court of Appeal confirms that government funding of educational courses may constitute third party consideration for supplies of services

In HMRC v Colchester Institute Corporation [2026] EWCA Civ 363, the Court of Appeal considered the VAT treatment of payments received by Colchester Institute Corporation (CIC) in the form of funding from government agencies to provide free courses to students and in particular, whether CIC's supplies were taxable supplies for consideration, for the purposes of VAT.

CIC argued that the funding was third party consideration for supplies of education as part of a business activity. HMRC's position was that the funding was in relation to a non-business activity and that any link between the payments and the supplies was not sufficiently direct.

The FTT dismissed CIC's appeal on the basis that there was no direct link between the services it provided to students and the funding received from the government. The UT overturned that decision and HMRC appealed to the Court of Appeal.

In dismissing the appeal, the Court of Appeal held that government funding for free educational courses offered by CIC could constitute third-party consideration for VAT purposes provided there is a sufficiently direct and identifiable link between the payments and the supplies.

The Court of Appeal found that there was a sufficient direct link in this case as the funding agreements, and the way the funding was calculated, demonstrated this. The funding had been calculated with reference to the courses delivered and the number of student places available. In the view of the Court, it was enough that the recipients were from an identifiable class, even if the specific students were not identified. The Court also confirmed that there is no requirement for a legal relationship between the payer and recipients, provided that payments are sufficiently linked to supplies made to third parties.

The decision can be viewed here.

Why it matters

This decision is significant due to its wider ramifications for any organisation dealing with government funding, including charities. Provided there is a sufficiently direct link between payment and supply, government funding may constitute third-party consideration for VAT purposes. Given the importance of this case, it will be interesting to see if HMRC seek to appeal the decision to the Supreme Court.