VAT update January 2026

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

News

• HMRC has published a Brief confirming that the supply of temporary medical staff is exempt from VAT and that affected businesses may submit rebate claims for overpaid VAT, subject to the usual statutory limits and conditions.

HMRC's Brief can be viewed here.

• HMRC is targeting VAT agents with a history of late VAT returns, as part of a wider compliance and agent-standards initiative aimed at improving timely filing and reducing error and fraud within the VAT system.

HMRC's pro-forma letter can be viewed here.

• HMRC has published a Policy paper confirming that, from 2 January 2026, private hire vehicle and taxi operators are excluded from the VAT Tour Operators’ Margin Scheme, meaning VAT must be accounted for on the full value of fares rather than the margin.

HMRC's Policy paper can be viewed here.

Case reports

Littlewoods Ltd v HMRC [2025] UKFTT 1602 (TC)

In this case the First-tier Tribunal (FTT) had to consider whether Littlewoods Ltd (Littlewoods) was entitled to recover input tax on costs incurred in producing product-specific photographs used in its catalogues and online retail business.

Littlewoods operates an online retail business selling consumer goods. Customers are also offered a range of flexible payment options, including interest-bearing credit and insurance, which are exempt supplies for VAT purposes. HMRC denied recovery on the basis that the photography costs were linked to both taxable supplies and exempt finance, arguing that it should therefore be treated as residual input tax for partial exemption purposes.  Littlewoods appealed to the FTT.

The key issue for the FTT to determine was whether the photography costs were directly and immediately linked solely to Littlewoods’ taxable retail supplies, or were they also linked to exempt supplies of credit and insurance.

The FTT applied the 'direct and immediate link' test, undertaking a multi-factorial and objective assessment of the costs by examining their nature and tracing how they were deployed in order to determine which supplies they were directly connected with.

The FTT found that the primary function of the photographs was to accurately display products to customers who could not see them in person, serving as a virtual substitute for a physical shop display. In addition, the FTT concluded that the costs of producing the photographs did not have a direct and immediate link to the exempt supplies of credit or insurance. Therefore, although the business model relied heavily on offering flexible payment options, it was insufficient to establish a direct link between the photography costs and exempt finance supplies.

Accordingly, the FTT allowed Littlewoods’ appeal, ruling that the photography costs were attributable exclusively to taxable retail supplies.

The decision can be viewed here.

Why it matters

This decision confirms that product-specific imagery can be fully attributable to taxable supplies, even if finance and insurance products are offered alongside the retail proposition.

The decision also demonstrates how VAT rules can apply in a partial exemption scenario and highlights the importance of a detailed factual analysis as retail models which, on their face, appear similar, can be subject to different VAT positions.

Hotel La Tour Ltd v HMRC [2025] UKSC 46

In this case the Supreme Court considered whether Hotel La Tour Ltd (HLT) was entitled to recover input VAT in respect of professional fees incurred in connection with the sale of shares in Hotel La Tour Birmingham Ltd (HLTB), HLT's wholly owned subsidiary.

HLT was a holding company which provided management services to HLTB, a company operating a luxury hotel in Birmingham. In order to fund the development of a new hotel in Milton Keynes, HLT sold its shares in HLTB and incurred professional fees (including corporate finance, legal and tax advice) amounting to £382,900 plus £76,823 VAT. HLT claimed recovery of the input VAT on the basis that the costs were linked to its overall taxable hotel business rather than to the share sale itself. HMRC denied recovery, contending that the costs were directly and immediately linked to an exempt share disposal. HLT appealed.

The key issue for determination in the appeal was whether the professional fees were directly and immediately linked to the exempt share sale, in which case the input VAT was irrecoverable or to HLT’s general taxable business, in which case the VAT would be deductible (in full or in part).

The FTT allowed HLT’s appeal, holding that the share sale was a fundraising transaction and that the professional fees were linked to HLT’s overall taxable business. The Upper Tribunal upheld that decision and HMRC appealed to the Court of Appeal. The Court of Appeal allowed HMRC’s appeal, concluding that the fees were directly and immediately linked to the exempt share sale. HLT appealed to the Supreme Court.

The Supreme Court dismissed HLT’s appeal. The Court rejected HLT’s submission that the direct and immediate link test is modified where a share sale is undertaken to raise funds for taxable activities. It reaffirmed that existing CJEU authority remains good law and that the motive of raising finance does not affect the identification of the relevant output transaction for VAT purposes. On the facts, the Supreme Court concluded that the professional costs were incurred as part of the process of disposing of HLTB and were therefore attributable to that exempt transaction, rather than to HLT’s wider hotel operations. The associated input VAT was accordingly irrecoverable.

The judgment can be viewed here.

Why it matters

The Supreme Court has confirmed a strict application of the direct and immediate link test in cases involving exempt share disposals. Where professional fees are incurred to carry out an exempt transaction, input VAT will be irrecoverable, even if the proceeds are used entirely to fund taxable activities.

This decision will also have wider importance for taxpayers involved in future corporate restructurings, group reorganisations and exits, where professional fees are incurred on share disposals.

East Midlands Waste Management Ltd v HMRC [2025] UKFTT 1603 (TC)

In this case the FTT considered whether East Midlands Waste Management Ltd (EMWM) should be permitted to bring three VAT appeals out of time, comprising two penalty appeals and one appeal against a VAT assessment.

The appeals related to two penalties issued under Schedule 24, Finance Act 2007 (Penalty 1 of £229,872 and Penalty 2 of £39,845) and a VAT assessment of £265,958. HMRC objected to the appeal of the two penalties but did not oppose the VAT assessment appeal. The FTT was therefore required to decide whether to exercise its statutory discretion to admit the late appeals.

The key issue for determination by the FTT was whether, applying the approach in William Martland v HMRC [2018] UKUT 178 (TCC) (Martland), now confirmed by the Court of Appeal in HMRC v Medpro Healthcare Ltd [2026] EWCA Civ 14 (Medpro) (judgment handed down on 19 January 2026), the FTT should grant permission for the appeals to proceed despite significant delays beyond the 30-day statutory time limit. Penalty 1 was appealed 273 days late and Penalty 2 was appealed 228 days late. The appeal against the VAT assessment was only 10 days late. In determining the appeal, the FTT applied the three-stage approach provided in Martland, which requires consideration of:

(1) the length of the delay;
(2) the reasons for the delay; and
(3) an evaluation of all the circumstances.

The FTT accepted that there was a period during which EMWM had a reasonable excuse for the delay, which was due to a change of advisers during a complex and ongoing HMRC investigation, combined with difficulties in obtaining complete records from the former adviser. However, the FTT found that the reasonable excuse did not extend indefinitely and that there were periods of unjustified delay, particularly after HMRC had rejected the late review requests.

Notwithstanding this, in all the circumstances, the FTT held that it would be disproportionate to deny EMWM the opportunity to challenge the penalties. The FTT concluded that, taking into account all relevant facts, HMRC could not have been in any real doubt as to the likelihood that EMWM would challenge the penalties. The penalty appeals were therefore admitted out of time. The appeal against the VAT assessment was also admitted.

The decision can be viewed here.

Why it matters

This case is significant in demonstrating how the tax tribunals are likely to approach applications for late appeals post-Martland and Medpro. Further clarification has also recently been provided by the Court of Appeal in Medpro.

Although statutory deadlines should be adhered to where possible in order to avoid the uncertainty of late appeal applications to the FTT, this decision shows that the FTT may admit a late appeal where fairness and proportionality justifies so doing. Transitions between professional advisors and level of engagement with HMRC can be relevant factors for the FTT to consider.