V@ update - July 2025

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

News

• M&S have launched a new Strawberries and Creme Sandwich inspired by the Japanese fruit sando. The unusual combination is causing controversy amongst food enthusiasts and VAT practitioners as to its VAT treatment.

The ICAEW's article can be viewed here.

• Employers will be able to recover VAT incurred on the costs of the investment management of defined benefit funds as their own input tax.

HMRC's Policy paper can be viewed here. 

• HMRC have updated their internal manual on VAT fraud in relation to deregistering businesses that misuse their VAT number following the recent cases of Impact Contracting Services Ltd v HMRC [2025] EWCA Civ 623 and Elphysic and others v HMRC [2025] UKUT 236 (TCC).

HMRC's updated internal manual can be viewed here. 

• HMRC is intensifying scrutiny on VAT treatment for flapjacks, cereal bars, and similar products, following the Court of Appeal’s decision in HMRC v Innovative Bites Ltd [2025] EWCA Civ 293. HMRC is now writing to businesses, requiring them to review and, if necessary, correct VAT errors going back four years, and to provide product details and ingredient lists. While an appeal to the Supreme Court is pending, HMRC is actively enforcing the new interpretation to close the tax gap in this sector.

Case reports

R (on the application of ALR and others) v Chancellor of the Exchequer [2025] EWHC 1467 (Admin)

The removal of the VAT exemption for private school fees by sections 47- 49, Finance Act 2025, was challenged in three judicial review claims that were consolidated and heard together:

1. A claim brought by children and parents who argued that they require schooling in private schools either because they have special educational needs (SEN), practise a particular faith, have a need for single-sex education, or because they have a need for a foreign curriculum.
2. A claim brought by children who have SEN but do not have an Education, Health and Care Plan.
3. A claim brought by four Evangelical Christian schools providing low-cost private education for parents requiring Christian education.

All the claimants claimed they would be unable to afford the increased fees and sought declarations under section 4, Human Rights Act 1998, that the new legislation was incompatible with the European Convention on Human Rights (ECHR), in particular:

1. Article 2 of Protocol 1 (A2P1), which protects the right to education.
2. Article 14, which prohibits discrimination in the enjoyment of Convention rights.
3. Article 1 of Protocol 1 (A1P1), which protects the right to peaceful enjoyment of possessions.

A2P1

The Court considered EU and domestic case law relating to the right to education and drew two key strands and confirmed that states have a broad margin of discretion to regulate education, provided they do not "impair the very essence of the right". This essentially creates a minimum requirement which, if not respected, might result in the exclusion of children from the education system and thus full participation in society. However, unlike other rights which focus on precluding state intervention, the right to education requires the deployment of limited public resources. Courts have therefore consciously avoided creating an obligation for states to establish particular types of education.

Applying these principles, the Court held that charging VAT on private school fees did not "impair the very essence of the right" to education because an alternative schooling option exists which the state provides free of charge. The parents who cannot now afford private school fees were effectively put in the same position in which the majority of parents already find themselves.

Article 14

The Court considered whether charging VAT on private school fees had a particularly severe impact on certain groups (such as Caredi Jewish children or children with SEN) and therefore could be considered discriminatory under Article 14.

Although the Court agreed that those groups were disproportionately affected by the change in the VAT position, it considered that the decision not to exempt those groups from VAT fell within the government's broad discretion. The government highlighted the administrative burden of such exemptions and the need to balance the interests of those groups against the interests of the potential beneficiaries of increased state funding.

A1P1

Finally, the claimant schools argued that charging VAT would make their businesses unviable and therefore their right to peaceful enjoyment of possessions was infringed. The Court held that this concern only related to future income which is not a possession and therefore is not covered by A1P1.

Why it matters:

This case touches on a wide variety of key public law concepts and for practitioners in this area it is worth reading the judgment in full. The central theme of the decision is that the government has a broad margin of discretion on matters of taxation policy. At [86], the Court referred to the motivation of the policy as an important factor. The government considered the measure to be redistributive as it imposed a burden on one group (the 6% attending private schools) for the benefit of another group (the 94% relying on state educational provision). The Court reaffirmed that decisions of this kind should be reserved for a democratically elected Parliament rather than the judiciary.

The decision can be viewed here.

JPMorgan Chase Bank NA v HMRC [2025] UKUT 188 (TCC)

JPMorgan Chase Bank NA (CBNA), based in the US, supplied back-office, trading infrastructure, HR, legal and other services to its UK affiliate, JPMorgan Securities plc (SPLC). Both are in the same UK VAT group. Traditionally, such intra-group supplies are ignored for VAT purposes. However, HMRC relied on the carve-out in section 43(2A)–(2B), Value Added Tax Act 1994 (VATA), whereby VAT must be charged if an overseas group member resupplies bought-in services to a partly exempt UK member.

HMRC issued VAT assessments on this basis which CBNA appealed to the First-tier Tribunal (FTT). The issue for determination was whether the supply of intra-group services should be treated as a single composite taxable supply, or whether it constituted separate, individual supplies.

CBNA argued the services should qualify for VAT exemption under UK rules (Schedule 9, Group 5, VATA), as some of the services were securities-related. HMRC argued that CBNA made a single supply of support function services to SPLC, which was taxable, and pointed to the lack of separate invoices for distinct services in support of its argument.

The FTT dismissed the appeal and CBNA appealed to the Upper Tribunal (UT).

The UT dismissed CBNA's appeal.

The UT said that the appropriate starting point was to consider the linkage, indivisibility and artificial splitting of the contractual arrangements between the parties. Although the contractual framework had distinct terminology for different supplies being made, the substance and nature of the services remained undifferentiated and linked. In light of the clear links between the services, any distinctions as to definitions or groupings were artificial. To the typical consumer, the services would reasonably be regarded as a single supply of business operations support.

With regard to the securities exemption, in the view of the UT, the intra-group services were administrative rather than effecting a significant change in the legal or financial positions of the parties. Accordingly, the circumstances did not meet the threshold for the securities exemption to apply.

Why it matters:

Multinationals cannot rely on VAT group status alone to shield cross-border support services. Where services originate outside the UK and are provided to partly exempt UK members, VAT is likely to apply. It is important that contracts and invoicing arrangements reflect the real economic substance.

It is clear from this decision that when intra-group supplies involve bought-in services from abroad, the entire supply could become taxable under UK law, even if parts relate to financial activities. Businesses may wish to reassess their service agreements and reporting to avoid unwelcome VAT liabilities.

The decision can be viewed here.

Performance Leads Ltd v HMRC [2025] UKFTT 660 (TC)

Performance Leads Ltd (PLL) offered 'lead generation' services and operated two consumer-facing websites. Visitors to its websites could search for financial advice in areas such as pensions or investments. PLL reviewed each enquiry and applied filters to determine whether the enquiry was suitable for follow up. If the lead satisfied the set criteria, it was passed to an independent financial advisor (IFA) who would follow up. The IFAs paid a commission for each lead but the lead could be withdrawn if they failed to act.

Between May 2018 and February 2022, PLL accounted for VAT on the basis that the leads - were chargeable to VAT. However, PLL formed the view that most of those supplies were actually "intermediary services" in relation to financial services transactions within the proper meaning and effect of Schedule 9, Group 5, Item 5, VATA  and its agent submitted an Error Correction Notification seeking repayment of £247,407.92 of overpaid VAT.

HMRC refused PLL’s claim for overpaid VAT and it appealed to the FTT.

PLL claimed its service was exempt from VAT as it involved bringing together clients and advisers in connection with financial services. HMRC disagreed and argued that the company merely supplied advertising services or acted as a “mere conduit” for information, neither of which qualifies for exemption.

The FTT allowed PLL's appeal and rejected HMRC’s position. It held that the company was not simply advertising the services of IFAs. It did not promote specific firms or allow them to influence how or when they appeared to consumers. Rather, the company independently assessed enquiries before matching them to a suitable adviser. This filtering process added value and demonstrated that the company was more than a conduit for information.

The FTT noted that the exemption under Item 5 can apply where a supplier is involved in work “preparatory to the conclusion” of financial services contracts. It is not necessary for the intermediary to bring both parties together directly, or to be involved in the conclusion of the contract itself. The lead-vetting process satisfied this test and therefore  the exemption applied.

Why it matters:

This decision clarifies what does and does not qualify as financial intermediation for VAT purposes. Merely forwarding client details, or offering advertising space, will not attract exemption. But where a business plays an active role in preparing, or filtering, leads for regulated financial services, may be exempt.

The case is a reminder that context and functionality are important. Labels like such as 'advertising' or 'lead generation' are not decisive. What matters is how the service operates in practice.

The decision can be viewed here.