VAT update October 2025

Welcome to the October 2025 edition of RPC's VAT update, your monthly source for news and insightful analysis from the world of VAT.

News 

• The Chartered Institute of Taxation (CIOT) has submitted a budget representation on repayment interest and commercial restitution for VAT, highlighting issues such as the imbalance between the rates of repayment and late payment interest.

The CIOT's representation can be viewed here.

• HMRC has updated its internal manual on VAT input tax to clarify when a late claim for input tax can be made.

The updated manual can be viewed here.

• HMRC has corrected an error in VAT cash receipts which has led to an upwards revision of VAT cash receipts by £2.4 billion (approximately 3% of year-to-date VAT receipts).

HMRC's monthly bulletin can be viewed here.

Case reports

The Prudential Assurance Company Ltd v HMRC [2025] UKSC 34

The Supreme Court considered whether a performance-based “success fee” payable by Prudential Assurance Company Ltd (Prudential) to its former group company, Silverfleet Capital (Silverfleet), was subject to VAT.

Silverfleet provided investment management services to Prudential. A success fee was payable to Silverfleet when the value of the funds exceeded a threshold fixed in a services supply contract.  When those services were supplied, both companies belonged to the same VAT group, and therefore supplies between them were disregarded for VAT purposes, under section 43, Value Added Tax Act 1994 (VATA).

Several years later, after Silverfleet left the VAT group, the success fee became payable. Silverfleet issued an invoice to Prudential for the fee plus VAT. HMRC accepted that VAT was properly chargeable, but Prudential contended that no VAT should apply because the underlying services were rendered while both parties were in the same VAT group, and therefore the supply was outside the scope of VAT.

The key issue for determination was whether VAT-grouping rules under section 43 displaced the ordinary “time of supply” rules, given that the underlying investment management services had been performed while both companies were in the same VAT group.

The Supreme Court unanimously dismissed Prudential’s appeal, holding that the “time of supply” for VAT purposes occurred when the success fee became due and was invoiced. As Silverfleet’s invoice was issued after Prudential's departure from the VAT group, the success fee was not an intra-group supply, and VAT was properly due. The Court further held that section 43 does not displace the ordinary time-of-supply rules. VAT grouping is not a “self-contained code” but operates within the broader framework of VAT law.

Why it matters:

This decision clarifies the interaction between VAT grouping and time of supply rules. Deferred or performance-linked payments may attract VAT if invoiced after a party leaves a VAT group, even where the underlying services were performed earlier. Businesses with group structures and contingent fee arrangements should review their contracts and VAT accounting practices to ensure proper treatment when group membership changes.

The judgment can be viewed here.

Isle of Wight NHS Trust v HMRC [2025] UKFTT 1114 (TC)

The Isle of Wight NHS Trust (the Trust) appealed HMRC’s decision that the supply of locum medical practitioners to the Trust did not qualify for VAT exemption under Item 5, Group 7, Schedule 9, VATA. HMRC determined that such supplies were taxable supplies of staff rather than exempt supplies of medical care.

The key issue before the First-tier Tribunal (FTT) was the correct interpretation of Item 5, which exempts “the provision of a deputy for a person registered in the register of medical practitioners.” HMRC argued for a narrow reading consistent with EU law, that the exemption applies only where medical care is directly supplied to patients. The Trust contended that the natural meaning of “provision of a deputy” was broader and covered the supply of locum doctors acting as substitutes for registered practitioners.

The FTT also considered whether certain documents, including internal HMRC policy papers and Hansard extracts, could be used to interpret Item 5. The FTT held that such materials were inadmissible, except for public explanatory documents, reaffirming that non-public internal HMRC files cannot be relied upon as an aid to statutory interpretation.

The FTT accepted the Trust’s interpretation, finding that Item 5 should be given its ordinary meaning. It held that the supply of locum doctors constituted the provision of deputies for registered medical practitioners and therefore fell within the VAT exemption. The FTT rejected HMRC’s argument that the provision should be limited to supplies of medical care in a narrow sense, noting that to do so would contradict the clear statutory wording. The appeal was therefore allowed.

Why it matters:

This decision has significant implications for NHS bodies and locum agencies. It may mean that many locum doctor supplies are VAT exempt, potentially leading to substantial VAT recovery claims. The case also reinforces that where statutory language is clear, tax tribunals will apply its ordinary meaning, and internal HMRC policy documents cannot be used to interpret legislation.

The decision can be viewed here.

Bottled Science Ltd v HMRC [2025] UKUT 00313 (TCC)

Bottled Science Ltd (Bottled Science) sought permission from the Upper Tribunal (UT) to appeal the FTT's decision that its collagen-infused drink, Skinade, was not zero-rated for VAT as food under Item 1, Group 1, Schedule 8, VATA.

The key issue determined by the FTT was the correct interpretation of the term “food” in the VAT context and whether a collagen drink qualifies as “food of a kind used for human consumption”. The FTT determined that Skinade does not fall into this category and should be treated as a standard-rated product, on the basis that it was marketed and consumed primarily for cosmetic or health purposes, rather than as food.

Bottled Science argued that the FTT had erred in law by:

1. not applying the principle that “food includes drink” under Note 1 to Group 1, Schedule 8, VATA;

2. placing too much emphasis on marketing and promotional material rather than on the product’s ingredients, nutritional content, and regulatory classification; and

3. wrongly conflating the purpose of consumption with nutritional function, applying an overly narrow test for “food”.

The UT granted permission to appeal the FTT's decision on all three grounds, concluding that the grounds raised arguable errors of law with a realistic prospect of success. The case is to proceed to a substantive appeal hearing before the UT.

Why it matters:

The case is significant for companies producing borderline food and drink products with cosmetic or health claims, as it may clarify how the VAT zero-rating rules apply to functional beverages. It also highlights that the classification of products for VAT purposes depends on the ordinary meaning of statutory language and a balanced assessment of all relevant factors, and should not be based solely on marketing or promotional material.

The decision can be viewed here.