V@ update - May 2025

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

News

• HMRC has published Spotlight 70, highlighting tax avoidance arrangements used by state-regulated care providers to reclaim VAT. The arrangements use a combination of VAT grouping and the application of different VAT liabilities, depending on whether welfare services are supplied by a state-regulated or unregulated care provider. HMRC consider these arrangements to be a form of tax avoidance and ineffective.
  
  Spotlight 70 can be viewed here. 
  
  
• HMRC has published Guidance on road fuel scale charges for VAT, which apply from 1 May 2025 to 30 April 2026.
  
  HMRC's Guidance can be viewed here.
  
  
• HMRC has updated its internal manual on VAT registration, including how to determine whether someone must or may register for VAT and changes to the details held on the VAT register.
  
  HMRC's updated internal manual can be viewed here. 

Case reports

Tony John Shepherd v HMRC [2025] UKFTT 00423 (TC)

Tony John Shepherd operated a taxi business between 2004 and 2019. He considered himself an agent for the drivers, retaining 50% of fares and accounting for income tax on that portion. Based on professional advice, he did not register for VAT, believing his turnover was below the registration threshold.

In January 2021, HMRC assessed Mr Shepherd for VAT liabilities totalling £139,456. HMRC's position was that Mr Shepherd acted as principal and should have accounted for VAT on 100% of the turnover (i.e. 100% of fares received).

On review, HMRC reduced the assessment to £33,885, covering the period from 1 August 2016 to 31 March 2019. Mr Shepherd appealed this reduced assessment to the First-tier Tribunal (FTT).

The FTT considered whether:

1. HMRC's assessment was made within the statutory time limits as provided for in the Value Added Tax Act 1994 (VATA); and
   
   
2. HMRC had sufficient evidence to justify the assessment under the 'best judgment' rule.

The best judgment rule, in section 73, VATA, allows HMRC to make assessments "to the best of their judgment", when, amongst other things, a person has failed to make a return.

The FTT allowed Mr Shepherd's appeal, concluding HMRC's assessment was invalid as it did not reach the 'best of judgment' standard.

HMRC failed to demonstrate that Mr Shepherd acted as principal rather than agent, lacking adequate evidence to support its position. The FTT highlighted that HMRC did not explain the weight given to the various factors relied on nor how the information, on which its decision was based, was processed to enable it to reach the conclusion it did.

Why it matters

This case highlights the need for HMRC to be able to provide clear evidence regarding the process by which it has issued a 'best of judgment' assessment. Where such evidence is lacking, the FTT is likely to allow a taxpayer's appeal when this is the issue to be determined.

The decision can be viewed here.

Roseline Logistics Ltd v HMRC [2025] UKFTT 427 (TC)

Roseline Logistics Ltd (Roseline) purportedly acted as a customs agent for QP Trading Ltd (QPTL) between January and May 2022, submitting 32 import declarations that utilised Postponed VAT Accounting (PVA). PVA allows VAT-registered traders to account for import VAT on their VAT returns instead of paying it at the point of import.

Unbeknown to Roseline, QPTL was not eligible for PVA during this period, having had their VAT registration cancelled. Roseline had no direct contact with QPTL and had not verified the position, preferring to  rely on the instructions of a third-party. When QPTL went out of business HMRC issued Roseline with a post-clearance demand for c.£1.1m in import VAT.

HMRC argued that Roseline was jointly liable under sections 6(3)(b) and 6(3)(d), Taxation (Cross-border Trade) Act 2018 (TCTA), due to its role as customs agent or otherwise involvement in the breach.

Roseline appealed to the FTT.

The FTT considered the following two primary questions:

1. was Roseline jointly and severally liable for QPTL's unpaid import VAT under the specified provisions of the TCTA, given it knew, or should have known, about this breach of customs obligations; and
   
   
2. would holding Roseline liable infringe its rights under Article 1 of Protocol 1 of the European Convention on Human Rights (A1P1), which protects the right to peaceful enjoyment of possessions?

The FTT considered whether Roseline was validly appointed and authorised to act as QPTL's customs agent. The FTT concluded that although Roseline had not actually been authorised to act as it did, it was nevertheless involved in the breach of customs law. This was because it acted as a declarant or person on whose behalf the declarations were made, failed to establish the availability of PVA to QPTL and submitted the relevant forms to HMRC nonetheless. In addition, it should have known of QPTL's ineligibility for PVA and its own responsibility for getting the goods through customs. The FTT therefore dismissed Roseline's appeal and held:

• Roseline was jointly and severally liable for the unpaid import VAT under sections 6(3)(d) and 6(4)(b), TCTA; and

• this liability did not violate Roseline's A1P1 rights, as the interference was lawful, pursued a legitimate aim (preventing tax loss), was proportionate and this was not a case involving a penalty regime.

Why it matters

This case underscores the importance of customs agents verifying the VAT status and PVA eligibility of their clients. Robust procedures need to be in place, as acting on behalf of clients can result in substantial VAT liabilities for an agent where there has been non-compliance. The decision also confirms that such liabilities do not necessarily breach human rights protections when they serve legitimate and proportionate aims.

The decision can be viewed here.

JD Wetherspoon PLC v HMRC [2025] (TC/2022/12962) 

Between 15 July 2020 and 31 March 2022, the UK implemented a temporary reduced VAT rate for hospitality services to support the sector during the COVID-19 pandemic. The legislation, including the Value Added Tax (Reduced Rate) (Hospitality and Tourism) (Coronavirus) Order 2020 and subsequent amendments, specified that certain supplies of food and drink were eligible for the reduced rate. However, the legislation excluded "alcoholic beverages" subject to excise duty, such as spirits, beer, wine, and made-wine, from this reduced rate.

JD Wetherspoon PLC (JDW) sought repayment of VAT on all supplies of cider on the basis that such supplies ought to have been subject to the reduced rate. HMRC was of the view that that cider fell within the exclusion for alcoholic beverages subject to excise duty and refused the claim. JDW appealed to the FTT.

The FTT examined the statutory language and concluded that the term "alcoholic beverages" in the legislation includes cider, although it was mistakenly left out. The FTT was of the view that Parliament clearly intended to define the scope of "alcoholic beverages" to encompass cider.

Applying the principle established in Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586, where courts have the power to correct obvious legislative drafting errors in certain circumstances, the FTT found that the conditions necessary for the Inco principle to apply were satisfied. The FTT therefore determined that the exclusion should be interpreted to include cider, consistent with the legislative intent to apply the reduced VAT rate to a broader range of alcoholic beverages served in hospitality settings.

Why it matters

This decision confirms that cider is excluded from the reduced VAT rate for hospitality services. Businesses in the hospitality sector should review their VAT practices to ensure compliance with this interpretation. The case is an example of the FTT being prepared to read words into legislation in order to give effect to the intention of Parliament when enacting the legislation. Taxpayers may not always be able to rely on a literal interpretation of statutory provisions.

The decision can be viewed here.