VAT Update – March 2025

The First-Tier Tribunal (FTT) has rejected an application from HMRC to strike out an appeal with respect to a Reemtsma type claim.

In the event a supplier incorrectly charges VAT of 20%, for example, on their supply to the customer when the VAT should have been charged at 5% or 0%, the customer would seek recourse from the supplier even if the customer was, in principle, entitled to VAT recovery. Incorrectly charged VAT is not input tax and cannot be reclaimed. However, what does the customer do if the supplier has ceased to trade, no longer exists (in the case of a dissolved company) or cannot be contacted for whatever reason?

The pre-Brexit CJEU case Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze (Case C-35/05), Reemtsma considered this position and concluded that there should be some recourse to the tax authorities and that the party which had been overcharged VAT could claim a refund of the overcharged amount from the tax authorities where it was not possible or was excessively difficult to seek a reimbursement from the supplier. The judgement in Reemtsma was pre-Brexit and for a short time HMRC accepted some claims on this basis, however it then used Brexit as the chance to close this opportunity, stating it was no longer bound by EU case law.

The opportunity for Reemtsma claims seemed dead and buried in the UK, however a recent decision by the FTT has signalled a remote possibility of such opportunities being reignited.

In Chris Poulton v The Commissioners for HMRC [2025] UK FTT 240 (TC) the Appellant applied for a VAT refund under the DIY housebuilder refund scheme and the claim was largely successful. A short time later the Appellant contacted HMRC to ask about claiming VAT back which a supplier, who had since gone into voluntary liquidation, had incorrectly charged. HMRC considered that the Appellant had submitted another claim and it rejected that claim on the grounds that Reemtsma could no longer be considered ‘good law’ post-Brexit. When Mr Poulton appealed, HMRC applied to the FTT for a strike off of the appeal, meaning the appeal would never be heard. The FTT has rejected this application from HMRC, and the case will be considered at the FTT. The strike off was rejected on two grounds:

• It was felt the point regarding whether or not the opportunity to make Reemtsma claims still existed post-Brexit, needed to be given proper consideration which would happen at the substantive hearing, and
• The appellant had a reasonable chance of winning on a technical point which regarded the scope of the DIY housebuilder refund scheme.

Comments

It remains to be seen whether the Appellant’s appeal will be successful but despite HMRC’s attempts, Mr Poulton will have his day in court. There was a very narrow window in which HMRC were accepting Reemtsma claims pre-Brexit, and it had been thought that such an opportunity may never arise again. However, Poulton has put Reemtsma claims back on the agenda albeit pending the substantive hearing for the appeal itself. A judgement in favour of the Appellant may provide some renewed opportunity, although that may be a narrow one restricted to DIY housebuilder refund claims. It will however be interesting to see the comments of the FTT with respect to which Reemtsma might still be good law, meaning wider scope for Reemtsma claims may still exist. HMRC could well appeal a decision that considers judgements such as Reemtsma as good law.

Please contact Nick Hart, VAT Director, to discuss if you have been overcharged VAT by a supplier and have been unsuccessful at obtaining a refund from the supplier.

HMRC has recently published a minor update to the VAT Notice Domestic reverse charge procedure (VAT Notice 735) – GOV.UK for the domestic reverse charge.  While the change itself is simply linking to VAT registration guidance, it does serve as a reminder when the domestic reverse charge applies.

The domestic reverse charge is a mechanism adopted by government as an anti-fraud measure with respect to the supply of specific goods and services which the government has previously identified as being high-risk from a VAT fraud perspective. The specified goods include mobile phones, computer chips, and wholesale gas and electricity. The specified services include emissions allowances, wholesale telecommunications, renewable energy certificates, and construction services. There are some exclusions, such as supplies to businesses who are not VAT-registered and not liable to be registered, supplies to customers for non-business purposes, and cross-border transactions of the specified goods and services.

The domestic reverse charge applies to the supply of specified goods and services between UK VAT-registered persons for business use and means that the customer is liable to account for the VAT on the supply, rather than the supplier. For business customers who are not VAT registered, the value of reverse charge supplies being received does count towards the taxable turnover VAT registration threshold (currently £90k) so the obligation to account for reverse charge VAT can result in VAT registration obligations being triggered.

Specifically for mobile phones and computer chips, there is a £5,000 de minimis limit, which means that the reverse charge only applies to these if the VAT-exclusive value of the goods is greater than £5,000. If the value is less than £5,000, the supplier will account for the VAT as normal.

Comments

The domestic reverse charge has a different scope to the reverse charge which applies when services are acquired from overseas supplies, but from a VAT reporting perspective, the same treatment applies with the customer accounting for the output tax and subject to conditions being met, can reclaim the input tax. Often, a reverse charge does not result in any additional liability for the customer although those businesses which are partially exempt and liable to reverse charge VAT would likely suffer a VAT cost, which they would have done anyway had the supplier charged and collected the VAT from them.

The reverse charge can be overlooked and can catch businesses out, particularly in the construction sector, and can lead to significant issues in correcting the past, even in situations where the parties involved can fully recover the VAT.

If you have any questions regarding reverse charge VAT in any context, please contact Nick Hart, VAT Director, for further details.

HMRC has published its final evaluation of Making Tax Digital (MTD) for VAT Making Tax Digital for VAT: Final evaluation – GOV.UK. MTD for VAT became mandatory in April 2019 for certain taxpayers and then from April 2022 for the remainder of VAT registered businesses.

The objectives of MTD for VAT were:

1. Reducing the VAT gap by reducing errors and encouraging reasonable care to be taken
2. Provide a framework for which business would find it easier to report the correct amounts of VAT
3. To create productivity gains through digitalisation thereby having wider economic benefit.

HMRC considers MTD for VAT has been successful in the following ways:

• The policy helped to generate additional VAT revenue in line with original forecasts. HMRC has estimated additional VAT of between £185 million and £195 million was collected in the first year of implementation.
• MTD for VAT has been straightforward for most businesses to implement with a majority finding initial sign-up a simple process and no issues identifying suitable functionally compatible software.
• Taxpayers had more confidence that the VAT returns being submitted were correct.
• The use of functionally compatible software has made VAT reporting more efficient which has had wider positive impacts for business with operational and financial benefits being realised.

MTD for VAT was the first step in the modernisation of the UK tax system and has enabled businesses to maintain digital accounting records and file VAT returns through functionally compatible software. The risk of errors occurring due to the manual handling of data (including manually entering VAT figures onto a VAT return) has been reduced.

Research commissioned by HMRC suggests that businesses find the VAT return preparation process under MTD to be quicker, although initial costs with respect to software and taking advice from specialists on implementation was also flagged.

Comments

HMRC’s final evaluation contains a raft of statistics based on the research undertaken from a number of sources. The statistics suggest more tax has been collected, less errors have been made, and businesses generally feels that the VAT return filing process is simpler and this had led to an increase in confidence that VAT is being reported correctly. It would have been interesting to see data on the number of error correction notifications sent into HMRC since MTD for VAT was mandated and the reason for those errors.

The other interesting point to note regarding MTD for VAT, is the extent to which HMRC has been auditing business on MTD matters when conducting VAT inspections and similar assurance events, particularly with respect to maintaining digital records and ensuring the digital journey of relevant data is complete (with some allowable manual adjustments still being required). HMRC’s publication of their Guidelines for VAT Compliance in September 2024, suggests that HMRC believes businesses have some way to go generally with respect to having adequate process and control over VAT reporting, which would include the digital journey of VAT related data through the accounting or other business records.

Please get in touch with Nick Hart, VAT Director, if you would like to discuss your business’s current approach to MTD for VAT and whether you have any concerns regarding retention of proper digital records.

A First Tier Tax Tribunal (FTT) case (Sarabande v The Commissioners for HMRC [2025] UK FTT 93 (TC)) has decided that the Appellant was not making an exempt supply of land and HMRC was not correct in disallowing input tax as a result.

Sarabande is a charity which provides the use of a studio and exhibition areas to artists, along with a package of other support services. Sarabande paid VAT when it acquired the studio site and also on its refurbishment and reclaimed the input tax. HMRC disallowed the input tax on the basis Sarabande was making exempt supplies of land. VAT on costs which are wholly attributable to exempt supplies is not recoverable as input tax.

Based on the understood facts and information provided to HMRC at the time the input tax had been disallowed, HMRC had concluded Sarabande was making an exempt supply of land to its subsidiary company which in turn was providing services to the artists using the studio facilities.

The FTT noted the lack of formal arrangements between Sarabande and its subsidiary, and the fact that it had entered into leases with artists before the subsidiary had been incorporated meant there was no supply of an interest in land by Sarabande to the subsidiary. The FTT also went onto conclude that Sarabande’s supply to the artists was one of a single bundle of support services and overall, the element of the supply, which was arguably the grant of an interest in or licence over land, was ancillary. Sarabande’s supply was taxable and therefore it had the right to VAT recovery on the acquisition, and the refurbishment costs.

Comments

An interesting case which turned on the facts and a good result for the Appellant. It is often the case with property that arrangements between those owning the property, those with other interests, and those using the property, are bespoke in nature and varied to fit the circumstances. The VAT position can become complicated, and advice is recommended, as there will often be a risk that there is an underlying exempt supply of land taking place (subject to an option to tax election) which denies or limits VAT recovery. Lease, licence or service agreements should be clear, even if between associated parties, in terms of what is being granted or supplied.

If you would like to discuss the implications of Sarabande in more detail please contact John Butterfield, VAT Director.