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Deeks VAT Newsletter issue 58 

Welcome to this Issue of Deeks VAT Newsletter    

May 2025 issue 58 

Keeping you up to date on VAT changes       

In this month’s newsletter we cover the following: 

VAT Treatment of Mega Marshmallows: Key Court of Appeal Decision 

First-tier Tribunal Decision Analysis: Eurolaser IT Ltd – Kittel and Mecsek Assessments VAT  

Grouping in the Care Sector – HMRC Targets VAT Group Strategies 

Tax update spring 2025: simplification, administration and reform 

Global Tariffs 2025: Impact on UK-US Trade Relations – How will Trump Affect it?   

Tipping Law Changes 2025: A VAT Guide 

Latest from the Courts 

VAT Treatment of Mega Marshmallows: Key Court of Appeal Decision 

VAT Treatment of Mega Marshmallows: Key Court of Appeal Decision  

The Court of Appeal ([2025] EWCA Civ 293) has overturned previous decisions regarding the VAT treatment of “Mega Marshmallows,” in a case involving Innovative Bites Ltd and Duelfuel Nutrition Ltd.  

Case Background:  

• Product: “Mega Marshmallows” – larger than standard marshmallows, marketed for roasting  

• Initial ruling: Zero-rated (not considered confectionery)  

• HMRC position: Should be standard-rated as confectionery  

Key Decision Points:  

The “Fingers Test”  

• Note 5 defines confectionery as including “any item of sweetened prepared food which is normally eaten with the fingers”  

• Previous tribunals failed to give appropriate weight to this crucial test  

Two Routes to Standard Rating:  

• Route 1: Is it confectionery by ordinary understanding?  

• Route 2: Is it sweetened prepared food normally eaten with fingers?  

Court’s Findings:  

• Rejected previous tribunals’ approach  

• Highlighted importance of the “fingers test”  

• Questioned whether size and intended use (roasting) should affect classification  

• Case remitted to new FTT to specifically consider how the product is normally eaten  

Practical Implications:  

This ruling emphasises that VAT classification of confectionery must consider:  

• The “fingers test” as a key determinant  

• Ordinary understanding of confectionery  

• Actual consumption method  

Full decision: https://www.bailii.org/ew/cases/EWCA/Civ/2025/293.html 

First-tier Tribunal Decision Analysis: Eurolaser IT Ltd  

Key Findings on Kittel and Mecsek Assessments VAT  

The Tribunal’s Principal Determinations: 

1. Agent’s Knowledge: Confirmed awareness or constructive knowledge of supply chain fraud 

2. Attribution: Knowledge was properly attributable to the Appellant 

3. HMRC Requirements: Confirmed obligation to demonstrate Appellant’s failure to take reasonable steps 

4. Due Diligence: Appellant failed to demonstrate reasonable steps taken 

5. Outcome: Appeal dismissed 

Significant Cost Implications 

The case highlighted important aspects of cost allocation in FTT proceedings, particularly regarding the costs protection regime under The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. 

Cost Award Framework: Rule 10(1) provides for cost orders in specific circumstances: • Wasted costs under section 29(4) of the 2007 Act • Unreasonable conduct in proceedings • Complex case allocation with no opt-out from cost liability 

Complex Case Classification Criteria: • Requires extensive or complex evidential presentation • Necessitates extended hearing duration • Involves sophisticated legal principles or significant issues • Concerns substantial tax or penalty amounts 

Critical Procedural Point: In Complex cases, appellants must actively request exclusion from cost liability within 28 days of case allocation notification. Eurolaser’s failure to ‘opt-out’ resulted in liability for HMRC’s costs. 

Additional Cost Considerations: Cost awards may also apply where appeals are deemed unreasonable, particularly in cases considered vexatious or frivolous. This underscores the importance of obtaining professional advice before proceeding with appeals. 

HMRC VAT Updates 

VAT Grouping in the Care Sector – HMRC Targets VAT Group Strategies 

On 24 April 2025, HMRC issued a Policy Brief formally confirming its stance on the use of VAT grouping structures within the care sector. In this commentary, we provide a deeper technical analysis of the position taken, the legislative backdrop, risks arising, and practical steps for those affected. 

Background: The VAT Challenge in the Care Sector 

State-regulated care providers (registered with the Care Quality Commission (CQC) in England, or the equivalent bodies in Scotland, Wales, and Northern Ireland) typically supply exempt welfare services under Group 7, Schedule 9, Value Added Tax Act 1994 (“VATA 1994”). 

Exempt status creates a well-known VAT tension: 

• No VAT is charged on supplies. 

• VAT recovery on related costs is restricted (often leading to significant irrecoverable VAT). 

Understandably, the sector has historically sought VAT efficiency, and VAT Group restructuring strategies emerged. 

What is a VAT Group Restructuring Strategy? 

The strategy involves introducing a non-state-regulated entity (i.e., not CQC-registered) into the corporate group. This unregulated entity contracts with the funding body (e.g., local authority or NHS Integrated Care Board) and makes taxable supplies, while the regulated entity delivers the actual care services. 

By VAT grouping the two entities together under s.43 VATA 1994: 

• Supplies between them are disregarded (no VAT charged between group members). 

• The group, as a single taxable person, recovers VAT on costs attributable to taxable supplies. 

In effect, VAT that would otherwise have been blocked becomes recoverable. 

However, this elegant restructuring largely depends on the existence of an artificial interposition, without any material change in the underlying economic supply, a red flag for HMRC. 

HMRC’s Formal Stance 

HMRC now openly categorises such arrangements as tax avoidance. The key observations made are: 

• The supply to the public sector body (e.g., local authority) remains essentially the same. 

• The insertion of an unregulated entity serves no real commercial purpose other than to engineer VAT recovery. 

• Identical supplies made directly to private individuals continue to be treated as exempt, reinforcing the artificial nature of the arrangement. 

HMRC regards this as incompatible with the intended operation of VAT exemption rules. 

Legal Framework: Protection of Revenue Powers 

HMRC cites its ability to act under: 

• Section 43C(1) VATA 1994: allowing HMRC to remove entities from VAT groups where necessary to protect the Revenue. 

This power is wide-ranging and discretionary. While historically used sparingly, HMRC’s clear statement signals an intention to deploy it far more assertively within this sector. 

Moreover, under the Disclosure of Tax Avoidance Schemes VAT and Other Indirect Taxes (DASVOIT) rules, advisors and businesses could also face separate reporting obligations where arrangements are considered abusive. 

Risks for Care Providers 

The risks of maintaining a VAT Group Restructuring Strategy now include: 

• Compulsory ejection from VAT groups by HMRC. 

• Assessment of input VAT incorrectly recovered, potentially plus interest and penalties. 

• “High-risk” taxpayer status, leading to enhanced scrutiny across all taxes for the business and connected persons. 

• Reputational damage particularly significant in the care sector where relationships with public sector bodies must be trusted and transparent. 

What Should Businesses Do Now? 

Providers operating or considering such structures must: 

• Undertake an immediate review of current VAT group arrangements, ideally with independent professional VAT adviser. 

• Assess the commercial rationale underpinning the structure. 

• Seek independent professional VAT advice where there is any doubt about the defensibility of the arrangement. 

• Consider voluntary disclosure if at risk. 

• Prepare for challenge, gathering evidence of the commercial substance behind arrangements. 

Where there is little or no defensible commercial purpose beyond VAT recovery, a proactive restructure may now be prudent 

Looking Ahead: A Strategic Approach 

At Deeks VAT Consultancy, we strongly advocate for strategic VAT planning that can survive HMRC scrutiny. 

The key is aligning VAT outcomes with genuine commercial activity, not mere paper exercises. 

Forward-thinking providers should consider: 

• Partial Exemption Special Methods (PESMs) to improve VAT recovery legitimately. 

• Shared services models with carefully designed contracts reflecting economic reality. 

• Alternative group structures ensuring that VAT grouping is only used where natural business integration supports it. 

Remember: Effective VAT planning is not about skating as close to the line as possible. It’s about building a model that stands strong when HMRC decides to blow the whistle. 

If you believe your business may be affected, or you would like an independent review of your VAT arrangements, Deeks VAT Consultancy is here to help. 

Tax update spring 2025: simplification, administration and reform 

Key Changes: 

1. Benefits in Kind 

• Mandatory payrolling delayed until April 2027 

2. VAT Simplification 

• Capital Goods Scheme simplified 

• Computers removed from scheme scope 

• Capital threshold value increased 

3. Employment Status 

• Revisions to Check Employment Status for Tax (CEST) tool 

4. Business Support 

• Reduced burdens on employers and small businesses 

• HMRC systems modernisation 

• Streamlined processes for individuals and traders 

5. Administration Reform 

• Technical tax policy proposals for system simplification 

• Focus on reducing administrative burden 

• Enhanced digital services 

The changes aim to support economic growth while simplifying tax administration for businesses and individuals. 

For full information see here: https://www.gov.uk/government/collections/tax-update-spring-2025-simplification-administration-and-reform 

 VAT Articles 

Global Tariffs 2025: Impact on UK-US Trade Relations – How will Trump Affect it? 

The business landscape between the UK and US is experiencing significant changes following the introduction of new global tariffs. Here’s what UK businesses need to know. 

Understanding the ‘Liberation Day’ Policy 

On April 2, 2025, the US administration announced sweeping changes to import tariffs, dubbed the ‘Liberation Day’ policy. While most nations face a 20% tariff, the UK secured preferential treatment with a 10% rate on most imports. This policy, effective from April 5, 2025, marks a significant shift in international trade dynamics. 

Sector-Specific Impacts 

Healthcare and Pharmaceuticals: 

• Largely exempt from new tariffs 

• Continued free flow of medical innovations 

• Protected status for essential medicines 

Manufacturing: 

• 10% base rate on finished goods 

• Component parts face varying rates 

• Opportunity for UK manufacturers to gain market share 

Technology Sector: 

• Mixed impact on hardware imports 

• Software services remain unaffected 

• Potential for increased UK tech investment 

VAT Considerations and Tariff Interaction 

Key Points for UK Businesses: 

• Tariffs form part of the VAT value 

• Import VAT remains recoverable under normal rules 

• Cash flow implications need careful management 

• Importance of accurate origin documentation 

Strategic Response Options 

1. Supply Chain Optimisation: 

• Review current US supply arrangements 

• Consider alternative sourcing options 

• Evaluate First Sale Rule benefits 

• Assess warehousing locations 

2. Pricing Strategies: 

• Negotiate with US suppliers 

• Review customer contracts 

• Consider absorption vs pass-through 

• Evaluate market positioning 

3. Documentation Requirements: 

• Origin certification 

• Value declaration 

• Preference documentation 

• Supply chain mapping 

Business Planning Considerations 

Short-term Actions: 

• Review existing contracts 

• Calculate immediate cost impact 

• Communicate with stakeholders 

• Update pricing models 

Long-term Strategy: 

• Invest in supply chain resilience 

• Explore new market opportunities 

• Build stronger US relationships 

• Consider UK manufacturing options 

Looking Ahead 

Market Predictions: 

• Potential for further tariff adjustments 

• UK-US trade agreement negotiations 

• Impact on global competitiveness 

• Opportunities for UK businesses 

Risk Mitigation: 

• Diversify supply chains 

• Build strategic partnerships 

• Maintain flexible pricing models 

• Invest in compliance systems 

Expert Guidance 

As these changes unfold, businesses should seek professional advice to navigate the complexities of international trade, tariffs, and VAT implications. Regular review of trade strategies and maintaining up-to-date compliance processes will be crucial for success in this evolving landscape. 

Tipping Law Changes 2025: A VAT Guide 

New Legal Framework Explained From July 2025, the Tipping Act 2024 introduces significant changes to tipping practices across the UK hospitality sector. This legislation aims to ensure fairness and transparency in how tips are distributed while maintaining clear VAT guidelines. 

Detailed VAT Implications: 

1. Service Charges – In-Depth Analysis • Mandatory service charges (e.g., 12.5% added to bills): 

• Must be included in VAT calculations 

• Form part of the taxable turnover 

• Need to be clearly shown on invoices as VAT-inclusive • System requirements: 

• Till systems must separate VAT elements 

• Regular reconciliation processes needed 

• Clear audit trail essential for HMRC inspections 

2. Discretionary Tips – Detailed Breakdown • Card payments: 

• Must have clear systems to identify voluntary tips 

• Separate banking arrangements recommended 

• Electronic payment systems need updating • Cash tips: 

• Direct staff payments remain VAT-free 

• Need documented procedures 

• Clear separation from business income 

3. Tronc Systems – Comprehensive Requirements • Essential criteria for VAT-free status: 

• Independent troncmaster appointment 

• Separate bank account 

• No employer involvement in distribution 

• Clear documentation of distribution rules • Record-keeping requirements: 

• Minutes of troncmaster appointments 

• Distribution policies 

• Payment records 

• Staff agreements 

4. Business Systems and Controls • Point of Sale Updates: 

• Review current systems 

• Update software if needed 

• Train staff on new processes • Banking Arrangements: 

• Separate accounts for tips 

• Clear transaction trails 

• Regular reconciliation processes 

5. VAT Compliance Checklist • Regular reviews of: 

• Till system configurations 

• Staff training materials 

• Banking arrangements 

• Documentation processes • HMRC requirements: 

• Clear separation of VAT and non-VAT elements 

• Proper record retention 

• Regular system audits 

6. Common Pitfalls to Avoid • Mixing mandatory and discretionary charges • Incorrect VAT treatment of service charges • Poor documentation of tronc systems • Insufficient separation of tip income 

Best Practice Recommendations: 

1. Review all current tipping practices 

2. Update written policies and procedures 

3. Ensure clear communication with staff 

4. Maintain robust documentation 

5. Regular system checks and audits 

Understanding VAT in Property Transactions 

The complexities of VAT in property transactions represent one of the most challenging areas of tax legislation. With property deals often involving substantial sums and tight deadlines, understanding the VAT implications is crucial for successful outcomes. 

The Critical Nature of VAT in Property 

Property transactions demand careful VAT consideration for several compelling reasons. Firstly, the intersection of land law and VAT legislation creates a uniquely complex environment where mistakes can be costly and far-reaching. The significant financial values involved in property dealings mean that VAT errors can have devastating impacts on business finances and project viability. 

Moreover, the one-off nature of many property transactions places businesses in unfamiliar territory. Unlike routine business operations where VAT treatment becomes second nature, property dealings often venture into unknown territory, increasing the risk of oversights or misunderstandings. 

Sector-Specific Challenges 

Healthcare providers face particular challenges when dealing with property VAT. Doctors’ surgeries, dental practices, and medical centres must navigate the complexities of partial exemption while managing substantial property investments. Their inability to recover all VAT on expenditure requires careful planning and strategic decision-making. 

Educational institutions encounter similar challenges. Academies and private schools must consider the VAT implications of their property use, particularly when facilities serve multiple purposes. Sports facilities, for instance, may have different VAT treatments depending on their usage patterns and user groups. 

Financial sector organisations face additional layers of complexity. Banks and insurance companies must carefully consider their partial exemption position when making property decisions. The option to tax commercial property becomes a strategic decision with long-term implications for their business operations. 

Strategic Decision Making 

The option to tax represents a unique feature of property VAT, it’s one of the few areas where taxpayers can choose whether to treat a supply as subject to VAT. This choice, however, requires careful consideration of long-term implications. The wrong decision can lead to unexpected VAT costs or lost opportunities for recovery. 

Timing considerations play a crucial role in property VAT planning. The point at which VAT becomes due, payment scheduling, and practical completion timing all impact cash flow and VAT recovery positions. Development phases must be carefully planned to optimise VAT treatment and minimise financial impact. 

In addition, anti-avoidance legislation should be considered where parties are connected.  

Risk Management and Best Practices 

Early planning remains the cornerstone of effective property VAT management. Pre-transaction reviews allow businesses to understand their VAT position and explore available options before commitments are made. Structure optimisation and cash flow planning should be integral parts of any property transaction strategy. 

Documentation requirements demand particular attention. Clear contractual terms regarding VAT treatment, properly maintained VAT status records, and option to tax certificates form essential elements of good VAT management. Land registry requirements must also be considered as part of the overall documentation strategy. 

Future Considerations 

The property VAT landscape continues to evolve. Environmental considerations increasingly influence property decisions, while technological advances create new challenges and opportunities. Staying informed about legislative changes and market developments remains crucial for effective property VAT management. 

Looking Ahead 

Success in property VAT management requires a combination of technical knowledge, strategic thinking, and careful planning. Whether dealing with new developments, property modifications, or change of use, early professional advice can help navigate the complexities and avoid costly mistakes. 

For businesses contemplating property transactions, the message is clear: VAT considerations should be at the forefront of planning, not an afterthought. The financial implications are too significant to leave to chance, and the complexity too great to navigate without expert guidance. 

📩 Contact us today for expert advice that protects your business and futureproofs your VAT position. 

For any VAT or TAX Enquiries contact:   

Jane Deeks, Managing Director   

 jane@deeksvat.co.uk   

 07710553831