VAT update August 2026

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

News

HMRC publishes brief on the VAT liability of the supply of temporary medical staff

HMRC has updated its position on the VAT treatment of past and present supplies of General Medical Council (GMC) registered locum doctors following the First-tier Tribunal decision in Isle of Wight NHS Foundation Trust v HMRC [2026] UKFTT 1114 (TC).

HMRC now accepts that supplies of GMC registered locum doctors may fall within the exemption in Item 5, Group 7, Schedule 9, Value Added Tax Act 1994 (VATA 1994), including where locum doctors are supplied via an employment business. The brief also explains how taxpayers can claim back overpaid output tax and the position in relation to previously recovered input tax.

View HMRC's Brief 6 (2026) on the VAT liability of the supply of temporary medical staff

HMRC publishes policy paper on the simplification of the Capital Goods Scheme (CGS)

The CGS is a mechanism that adjusts the amount of input VAT that can be reclaimed on high-value capital assets over several years.

The Value Added Tax (Amendment) Regulations 2026 (SI 2026/765), have been introduced making the following two key changes to the CGS, effective from 29 July 2026:

1. computers and items of computer equipment are removed from the list of assets covered by the scheme; and

2. the expenditure threshold for land, buildings and civil engineering work will increase from £250,000 (exclusive of VAT) to £600,000 (exclusive of VAT).

View HMRC's policy paper on the simplification of the Capital Goods Scheme

HMRC publishes policy paper on the new VAT accounting rules for supplies made under drink Deposit Return Schemes

HMRC has a proposed a new measure which is designed to simplify VAT accounting with the scheme administrator for each of the three national deposit schemes. As a result, businesses in the supply chain will no longer need to account for VAT on the deposit element of the price at each stage. Instead, the VAT liability on unrefunded deposits will rest centrally with the scheme administrator.

The measure is expected to be introduced in Finance Bill 2026-27.

View HMRC's policy paper on the VAT provisions for drink Deposit Return Schemes

Case reports

FTT considers whether taxpayer was agent or principal for VAT purposes

In Tapi Carpets Ltd v HMRC [2026] UKFTT 1128 (TC), the First-tier Tribunal (FTT) considered whether Tapi Carpets Ltd (Tapi) was liable to account for VAT on fitting fees received by independent flooring fitters for flooring supplied to customers by Tapi.

Tapi was a supplier of floor coverings. Customers purchasing flooring from Tapi had the option to fit the flooring themselves, arrange fitting themselves, or purchase a flooring fitting service from Tapi for a specified fee. Under the fitting service, Tapi arranged for an independent flooring fitter to attend the customer's premises to perform the fitting service and the customer paid the fitter the sum due. 

HMRC issued VAT assessments on the basis that Tapi was liable to account for VAT totalling £13,555,315 connected to its supply of services of the fitting of flooring to customers who had purchased flooring from Tapi. Tapi appealed the assessments.

Tapi accounted for VAT on the basis that, where it provided the fitting arrangement service, it acted as a disclosed agent for the customer in relation to arranging the fitting service, which was supplied by the fitter as the principal. In general, a disclosed agent is not liable to account for VAT as this is the responsibility of the principal, who makes the supply to the customer. HMRC's view, in contrast, was that the fitters supplied the fitting services to Tapi and, as principal, Tapi made an onward supply of the services to the customers. HMRC considered that Tapi should therefore have accounted for VAT on the fitting fees received by the fitters at the standard rate, rather than merely on the arrangement fee.

The FTT allowed Tapi's appeal and concluded that Tapi supplied the arrangement service to customers for the arrangement fee, on which Tapi correctly charged VAT, and the fitters supplied the fitting services to the customers, as principal, in return for the fitting fee, on which VAT would be due if the fitter was registered for VAT. In reaching its conclusion, the FTT considered the objective nature of the parties' contractual relationship by examining the language which the parties chose to express their agreement.

The FTT considered that agency is a "fiduciary relationship" which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect their relations with a third party. On payment of the arrangement fee, the customers trusted Tapi to act on their behalf, to source and put them in contact with a suitable fitter to fit the flooring which they had purchased from Tapi, and to set the necessary contractual terms and framework within which, if the fitter and customer agreed, they would contract for the provision of the fitting service. The fitters were then liable for the service provided to the customers, and the customers were liable to pay the fitters the fitting fee.

View the decision in Tapi Carpets Ltd.

Why it matters

Businesses operating under a similar agent/principal model should ensure that any underlying contracts accurately reflect the nature of the parties' relationships and that contracts are consistent with the commercial and economic reality of the arrangements.

The decision also has echoes of the FTT's decision in United Carpets (Franchisor) Ltd v HMRC [2025] UKFTT 895 (TC), in which the FTT held that United Carpets (Franchisor) Ltd's supply of flooring and fitting services were two separate supplies of goods (flooring) and services (fitting), not a single composite supply. View a summary of that case report in our VAT update of August 2025.

UT considers the Kittel principle

In Opus Labour Services Ltd (in liquidation) and another v HMRC [2026] UKUT 275 (TCC), the Upper Tribunal (UT) considered the application of the Kittel test. Under the Kittel test, the right to deduct input tax will be lost where a taxable person knew, or should have known, that their transaction was connected with the fraudulent evasion of VAT (see Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04)).

Specifically, the UT considered whether the FTT was correct to deny the appellants the right to recover input tax, and uphold the related personal liability notices issued by HMRC, on the grounds that the relevant transactions were connected with the fraudulent avoidance of VAT.

Opus Labour Services Ltd (Opus) was a recruitment company for the construction industry. Mr Jason Giller was the sole director and majority shareholder. Opus outsourced payroll administration to several payroll providers who paid the workers and invoiced Opus for their services, charging VAT. Opus reclaimed that VAT as input tax. HMRC alleged that the payroll providers defaulted on their obligations to pay VAT and denied Opus' right to deduct input tax and imposed penalties. HMRC later imposed personal liability notices on Mr Giller in respect of the penalties.

The FTT held that Mr Giller did not have actual knowledge of the fraud under the Kittel test but found that he did have constructive knowledge of the fraud and therefore, taking into account all of the circumstances, the appellants should have known that the relevant transactions were connected to the fraudulent evasion of VAT. In reaching this conclusion, the FTT identified that Mr Giller failed to think about facts directly in front of him and failed to consider and realise the implications of those facts. 

The UT was of the view that the FTT had directed itself properly on the law, including the Kittel test, and its application of the law to the facts. The UT held that it was clear from the FTT decision, read fairly and as a whole, that the FTT was adopting the correct position and considered the various causes for concern by reference to the objective position of a reasonable businessperson. The UT also rejected the appellants' arguments that the FTT made findings of facts or drew inferences that were perverse/irrational, or had no evidence to support them, or were made without regard to relevant factors or by reference to irrelevant factors.

View the decision in Opus Labour Services Ltd and another.

Why it matters

This decision emphasises the broad scope of the Kittel principle, which is extended through the concept of constructive knowledge, such that taxpayers can be denied input tax and be liable to penalties where the facts show that they should have known about the fraudulent evasion of VAT, even where there is no direct knowledge. Businesses should therefore undertake appropriate due diligence and take necessary steps to address any risk areas identified in their supply chains.

FTT considers reasonable excuse for VAT default surcharges

In Westbury Collections Ltd v HMRC [2026] UKFTT 1107 (TC), the FTT considered whether the appellant's appeal against VAT default surcharges, issued under section 59, VATA 1994, in relation to the late payment of VAT, should be allowed on the grounds that the appellant had a reasonable excuse.

Westbury Collections Ltd (WCL) is a debt collection business, and Mr Anthony Browne is the sole director. Mr Browne retained sole responsibility for the appellant's VAT returns. Mr Browne did not complete the relevant returns in time, and they were filed late throughout the relevant period. HMRC therefore issued WCL with surcharge liability notices.

WCL's two main arguments were that it had a reasonable excuse for the late payments of the VAT and that the surcharges were disproportionate. WCL pointed to a number of factors to argue that it had a reasonable excuse. This included impact of the Covid-19 pandemic, serious illness of both of Mr Browne's parents, various personal issues concerning Mr Browne's fiancée, the sudden death of an employee, dealing with mental health issues of employees in the wake of the pandemic and difficulties involving a bookkeeper and changes involving his accountants.

The FTT accepted that these difficulties occurred and that they had a significant impact on Mr Browne but did not consider them sufficient to give WCL a reasonable excuse for the late payments of the VAT applying the test set out in Perrin v HMRC [2018] UKUT 156 (TCC). The Perrin test requires the FTT to establish the facts giving rise to the reasonable excuse, to decide whether those facts are proven and whether, viewed objectively, those facts do indeed amount to an objectively reasonable excuse for the default. Additionally, the FTT was required to consider the time when the objectively reasonable excuse ceased and whether the taxpayer remedied the failure without unreasonable delay after that time. This analysis must be undertaken objectively, and the FTT must take into account the experience and other relevant attributes of the taxpayer, and the situation in which the taxpayer found himself.

The FTT considered that the majority of the factors identified by WCL arose in 2021 and that WCL continued to trade successfully throughout the relevant period. In the view of the FTT, Mr Browne simply chose to devote his attention to developing and maintaining the business rather than spending time on ensuring it complied with its VAT obligations, noting that this was not a case where WCL did not have available funds to pay the VAT. The FTT held that a conscious decision to focus on business development, at the expense of compliance with WCL's statutory obligations, cannot amount to a reasonable excuse. The FTT further held that the amount of the surcharges, amounting to just under £20,000 and representing marginally less than 15% of the VAT that was paid late without any reasonable excuse, was not disproportionate.

The FTT also concluded that, on the facts and evidence before it, each of the notices must be treated as having arrived at Mr Browne's home address and were therefore properly served.

View the decision in Westbury Collections Ltd.

Why it matters

This decision is a useful reminder that commercial pressures and the desire to preserve cash flow will not, without more, amount to a “reasonable excuse” for VAT non-compliance purposes. The FTT also confirmed that proportionality challenges to default surcharges are likely to succeed only in exceptional circumstances, even where the VAT has subsequently been paid in full. For businesses, the case underlines the importance of treating VAT compliance as a priority and seeking professional assistance when payment difficulties arise.