VAT update September 2025

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

News

• Chancellor, Rachel Reeves, has confirmed she will present her Autumn Budget on 26 November 2025. Labour pledged in their manifesto not to increase VAT for 'working people' but there has been some speculation around imposing higher rates of VAT for luxury goods or adjusting the VAT threshold.
  
  The Chancellor's press release can be viewed here.

• HMRC has updated VAT Notice 700/45, which explains how to correct VAT errors and make adjustments or claims.
  
  The updated Notice can be viewed here.

• HMRC has published new guidelines aimed at helping taxpayers ensure that the documents and returns they submit are correct and complete. The guidelines also explain what taxpayers should do if they are uncertain about their tax affairs or are considering novel interpretations of the law.
  
  HMRC's guidelines can be viewed here.

Case reports

Motorplus Ltd v HMRC [2025] UKFTT 931 (TC)

Motorplus Ltd (Motorplus) submitted an error correction notice to HMRC to recover input VAT on payments made to two of its suppliers. The suppliers believed their supplies to be VAT exempt and so did not charge VAT separately or provide Motorplus with a VAT invoice. Motorplus argued that the supplies were properly subject to VAT and so the price paid should be deemed to include VAT.

HMRC rejected the error correction notice on the basis that "at the time the supplies took place, both the supplier and the customer accepted that the supplies were exempt from VAT". HMRC relied on the Supreme Court's decision in Zipfit v HMRC [2022] UKSC 12, in which HMRC's refusal to allow a deduction for VAT was upheld, even though the supplies in question were subsequently found to be standard rated, because both parties believed they were exempt at the time of supply.

Motorplus appealed to the First-tier Tribunal (FTT). HMRC applied for the appeal to be struck out on the basis that it had no prospect of success.

The FTT noted that, contrary to the statement in HMRC's decision, both parties did not agree that the supplies were VAT exempt. Motorplus had always been of the opinion that the supplies were standard rated. The FTT dismissed HMRC's strike out application and held that Motorplus had a reasonable prospect of success. The key issue which remains to be determined at the substantive hearing, is whether the supplies were in fact exempt, and whether an amount equal to VAT formed part of the purchase price.

The decision can be viewed here.

Why it matters:

This case emphasises the importance of analysing HMRC's reasoning as well as its conclusion. The FTT criticised HMRC for not taking the time to consider whether the supplies were exempt, and proceeding to make their decision (and apply for the appeal to be struck out) solely on the mistaken basis that both parties agreed the supply was exempt at the time it was made.

Airline Placement Ltd v HMRC [2025] UKFTT 00894 (TC)

Airline Placement Ltd (APL) sponsored, i.e. paid for, training for trainee pilots and placed them with commercial airlines on qualification. The commercial airlines (British Airways, Virgin, and EasyJet) paid APL a placement fee equal to the cost of that training and accounted for VAT.

Separately, trainee pilots were asked to provide APL with a 'bond' also equal to the cost of the training. Upon placement, APL would pass the bond on to the commercial airline and the newly qualified pilot would agree to a salary sacrifice, over several years, equal to the amount of the bond.

HMRC argued that, when viewing the contractual position as a whole, it was the trainee pilot who actually paid for the training and therefore the payment of the bond to APL should be viewed as consideration for the supply of training, and subject to VAT. APL argued that the consideration for the training was the placement fee, and the purpose of the bond was simply to ensure trainees remained committed to the airline.

The FTT rejected APL's arguments and dismissed its appeal, highlighting the continuity between the trainee pilot's payments and the training received. However, the FTT did allow the appeal in part, recognising that HMRC had previously agreed the VAT liability should exclude services provided outside the UK.

The decision can be viewed here.

Why it matters:

This case clarifies the VAT treatment of training schemes involving multiple parties and complex payment structures. The case highlights the importance of properly identifying the recipient of the training and the consideration for that training. The FTT held that the trainee pilots, rather than the airlines, were ultimately the ones financing the training, and thus, the bond payment was considered part of the consideration for the training services and subject to VAT.

Colchester Institute Corporation v HMRC [2025] UKFTT 1017 (TC)

Colchester Institute Corporation (CIC) provides vocational further educational courses to students. The courses are provided free of charge and are partially funded by government grants.

In 2008, CIC embarked on a major building project. It initially recovered VAT on costs incurred on the building project and accounted for output VAT pursuant to the rule in Lennartz. That rule allows a taxpayer to deduct input tax up front and then account for deemed output tax on the provision of education and vocational services, which were thought to be non-business supplies and attract a tax charge.

CIC subsequently concluded that the grants received from the government should properly be construed as consideration for an exempt supply, on the basis it related to further education, with the result being that output tax was not due.

CIC applied to HMRC for the overdeclared output VAT to be repaid but HMRC rejected the claim on the basis that education and vocational training was a non-business activity when government-funded. CIC appealed to the FTT.

The FTT agreed with HMRC's interpretation and dismissed CIC's appeal.

CIC appealed to the Upper Tribunal (UT), who overturned the FTT's decision and allowed CIC's appeal. In its view, the government grants were consideration for an exempt supply.

The decision can be viewed here.

Why it matters:

There are several other sets of proceedings before the tax tribunals which deal with materially the same facts and issues. HMRC has reserved its arguments on the key issues for the Court of Appeal hearing set to take place in June 2026 (the Court of Appeal case concerns CIC but is a separate appeal concerning different tax years).  

The underlying legal issue in this litigation will have a significant impact on the education sector and organisations which receive government agency grants.