VAT update June 2026

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

News

HMRC publishes new brief on the temporary reduced rate of VAT for children's meals, tickets and family attractions

HMRC has confirmed that a temporary reduced rate of VAT of 5% will apply to certain supplies of children's meals, children's admission to theatres, cinemas, concerts, exhibitions and shows, and all admission tickets to attractions suitable for families with children.

This will apply from 25 June 2026 to 1 September 2026.

HMRC's brief can be viewed here.

HMRC publishes new brief on the VAT deduction on the management of pension funds

This brief explains a further policy change to the VAT deduction on the management of pension funds.

Employers can now claim back all the VAT on investment costs linked to pension funds and no longer need to split the cost with pension trustees.

If trustees are providing pension fund management services and charging the employer, they can also claim back VAT on their costs as long as they are VAT registered.

HMRC's brief can be viewed here.

HMRC updates VAT Notice 742A 'Opting to tax land and buildings'

HMRC has updated section 12.1 to clarify that where an opted land or building remains an asset on hand at the point of the cancellation of VAT registration, output tax must be accounted for.

The updated Notice can be viewed here.

Case reports

The Court of Justice of the European Union (CJEU) considers whether a transfer pricing adjustment is subject to VAT

In Stellantis Portugal SA v Autoridade Tributária e Aduaneira (Case C-603/24), the CJEU considered whether a retrospective adjustment to the sale price of vehicles should be treated as consideration for a supply of services, and therefore subject to VAT.

Stellantis Portugal SA (Stellantis), part of the multinational General Motors group, acted as a national distributor of motor vehicles in Portugal. It purchased vehicles from European group manufacturers (EGMs) and sold them to local dealers which, in turn, sold the vehicles to customers. Where those vehicles were affected by defects resulting from the production process or certain other issues, the customers presented the vehicles to the local dealers for repair. The dealers then invoiced Stellantis for the cost and applied VAT. Stellantis was required to keep the EGMs informed of the repair costs it had incurred, as well as other operating costs.

In 2004, Stellantis entered into an agreement with the EGMs concerning the prices of vehicles it purchased from them (the Agreement). At the end of each reference period, the prices of the vehicles were retrospectively adjusted to ensure that Stellantis maintained a specified profit margin under the Agreement. If, considering the costs incurred by Stellantis, the initial price was too low to obtain the agreed profit margin, the EGMs made a further payment to account for the difference. This adjustment was evidenced by a credit or debit note.

The tax authorities in Portugal argued that additional VAT should be charged on the adjustment payment, on the basis that it was consideration for repair services supplied by Stellantis to the EGMs. The issue was referred to the CJEU for a preliminary ruling.

In the view of the CJEU, there must be a direct link between the supply of services and the consideration received. Such a direct link is established where there is a legal relationship between the service provider and its recipient, pursuant to which there is reciprocal performance. The sole legal relationship in this case was the Agreement, and it did not include an obligation for Stellantis to repair the vehicles in return for consideration. Accordingly, and in the absence of any other evidence that would establish a legal relationship, there was no direct link between the supply of services and the consideration received, and therefore the adjustment was not subject to VAT.

The judgment can be viewed here.

Why it matters

The CJEU limited its judgment to the particular facts of this case, and did not take the opportunity to provide more general guidance on when transfer pricing adjustments will be subject to VAT.

Accordingly, the judgment is helpful only to taxpayers and practitioners considering similar fact patterns. The VAT consequences of other transfer pricing adjustments are uncertain and will need to be considered on a case-by-case basis.

The Upper Tribunal (UT) considers whether dip pots were part of a single or multiple supply

In Queenscourt Ltd v HMRC [2026] UKUT 195 (TCC), the UT considered (1) whether dip pots supplied with KFC meal deals were a separate zero-rated supply for VAT purposes, or formed part of a standard-rated supply of hot food comprised within the meal deal; and (2) whether the First-tier Tribunal (FTT) had jurisdiction to consider arguments based on legitimate expectation given that HMRC had at one point accepted the dip pots as being treated as zero-rated.

Until early 2019, Queenscourt Ltd (Queenscourt) accounted for VAT on the basis that dip pots supplied as part of a KFC takeaway meal deal formed part of a single standard-rated supply. It later formed the view that a meal deal should be treated as a multiple supply, with the result that the component parts, including dip pots, could be zero-rated, if that was how they were treated when supplied on their own. 

The FTT found in favour of HMRC, concluding that dip pots supplied as part of a meal deal formed part of a single standard-rated supply with the hot food. The FTT also rejected the legitimate expectation argument raised by Queenscourt.

The UT allowed Queenscourt's appeal. It held that every supply, including every element in a multi-element transaction, which would be a supply if provided on its own, should be regarded as distinct unless one of the recognised exceptions applies. Those exceptions operate only where the transaction as a whole is treated as a single supply. In the UT's view, the FTT had made an error of law in concluding that there was no reason, in principle, why two or more elements of a single transaction could not constitute a single supply whilst, at the same time, other elements of the same transaction might constitute a separate supply.

Given the decision reached on the VAT issue, the UT did not determine the public law issue. However, it is worth noting that the UT commented on errors it found in the reasoning applied by the FTT on this issue.

The decision can be viewed here.

Why it matters

This case highlights the difficulty that exists in determining the VAT treatment of transactions where there is interplay between single and multiple supplies.

The decision has significance beyond the fast-food sector, and will be of interest to any business offering bundled pricing where different components may carry a different VAT liability.

The FTT considers the application of the Kittel principle to input tax claimed by construction company

In Big and Small Construction Ltd v HMRC [2026] UKFTT 816 (TC), the key question for determination by the FTT was whether Big and Small Construction Ltd (BSCL) knew, or should have known, that its transactions were connected with fraudulent VAT loss.

BSCL specialises in a highly technical area of construction for commercial property sites and appealed against the following two decisions of HMRC:

1. In the first decision, HMRC denied BSCL's claim to input tax in relation to dealings with labour-suppliers Proedyl Ltd, Sandmill Ltd, Services A-Z Ltd (A-Z) and Storm Gates Building Ltd (together, the Defaulters) and consequential assessments pursuant to section 73, Value Added Tax 1994 (VATA) (the Input Tax Decision). HMRC denied the claim on the basis that the transactions which gave rise to input tax were connected with VAT fraud and HMRC considered that BSCL knew, or should have known, that this was the case.

2. In the second decision, HMRC issued BSCL with a penalty under section 69C, VATA, in the sum of £187,248.60 (the Penalty Decision).

It was common ground that there was a VAT loss occasioned by fraud, and that BSCL's transactions were connected with the fraudulent VAT loss. The key question was whether BSCL knew, or should have known, that its transactions were connected with fraudulent VAT loss.

On the Input Tax Decision, the FTT referred to Moses LJ's comments in Mobilx Ltd (in Liquidation) v HMRC [2010] EWCA Civ 51, and held that, from the information available to BSCL during the relevant period, BSCL could not have concluded that "there was no reasonable explanation for the circumstances in which [any] transaction was undertaken other than it was connected with fraud". BSCL did not know that 76.1% of its inputs traced back to fraudulent tax losses and the fact that the invoices failed to comply with requirements for a valid VAT invoice was not relevant to HMRC's decision. Additionally, the FTT considered that BSCL was not put on enquiry merely because one of the Defaulters regularly changed its bank account.

However, the FTT considered that certain A-Z invoices, which contained two sets of VAT registration numbers and UTRs, should have made BSCL suspicious. A reasonable trader in BSCL's position should have made reasonable enquiries to make sure that A-Z's tax affairs were in order, and such enquiries would have revealed that A-Z was a fraudulent defaulting trader. BSCL's appeal in relation to the Input Tax Decision was therefore allowed, except to the extent input tax was incurred on supplies from A-Z in certain VAT periods.

In relation to the Penalty Decision, in respect of Proedyl Ltd, Sandmill Ltd, and Storm Gates Building Ltd, the FTT held that, as condition B of section 69C, VATA 1994 (which required BSCL to have knowledge that the transaction was connected to fraud), had not been satisfied on the basis of its findings, the appeal was allowed. In respect of A-Z, the FTT exercised its power to reduce the penalty to nil on the basis that BSCL was acting in good faith.

The decision can be viewed here.

Why it matters

This decision reinforces that a Kittel-based denial of input tax cannot be justified by generic criticism that a trader merely should have carried out more due diligence. The FTT stressed that "should have known" requires identifying what means of knowledge were available to the trader and, crucially, what reasonable, practical enquiries it could have made that would have revealed the fraud connection.

The case also demonstrates the limits of "high-risk sector" arguments where the trader has not been clearly educated or warned by HMRC and there are no transaction-specific triggers.