Deeks VAT News Issue 66: The Latest to Keep You (and Your Clients) Compliant and Clever

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Welcome to this Issue of Deeks VAT Newsletter    

September 2025 issue 66 

Keeping you up to date on VAT changes        

In this month’s newsletter we cover the following: 

Upper Tribunal Ruling: HMRC Cracks Down on Mini Umbrella Company Fraud 

Grant Funding and VAT in Further Education 

HMRC Update. VAT Registration: Effective Date of Registration (EDR) 

HMRC Update. Excise Notice 179: Motor and Heating Fuels 

CIL Fact Sheet 

Breaking Down the Changes in VAT Penalties 

Latest from the Courts 

Upper Tribunal Ruling: HMRC Cracks Down on Mini Umbrella Company Fraud 

On 17 July 2025, HMRC secured a decisive win in the case of Elphysic & Ors v HMRC, where the Upper Tribunal (UT) ruled that the mini umbrella company (MUC) model used in the case was fraudulent. 

Mini umbrella companies are small, short-lived entities often set up in large numbers with the intention of abusing tax reliefs. In this case, the UT confirmed that the MUCs in question had been created to fraudulently exploit both the VAT Flat Rate Scheme and the Employment Allowance, while giving the appearance of legitimate employment arrangements. 

This ruling is significant because it reinforces HMRC’s power to: 

• Deregister mini umbrella companies from VAT, cutting off one of the main routes of abuse. 

• Challenge the use of the Flat Rate Scheme, where turnover is artificially lowered by fragmenting a workforce across multiple companies. 

• Tackle fraudulent claims to the Employment Allowance, which is intended to help small, genuine employers with their National Insurance contributions. 

From April 2026, the rules will tighten further. Recruitment agencies will be legally responsible for ensuring that the correct tax is paid on workers’ income. Where no recruitment agency is involved, the liability shifts directly to the end client engaging the workers. This places a clear compliance burden on the supply chain to properly check the status of any umbrella arrangements. 

HMRC has also published updated guidance on mini umbrella company fraud, highlighting the warning signs businesses should look for and setting out the support available to workers who may have been unwittingly caught up in these schemes. 

This decision sends a strong message: HMRC is actively pursuing fraudulent models that undermine the tax system, and businesses in labour supply chains must review their arrangements to avoid being exposed to future liabilities. 

Grant Funding and VAT in Further Education 

The First tier Tribunal has released its decision in the cases of Derby College Group and Cornwall College. Both appeals centred on whether government funding agency grants should be treated as consideration for a supply of education or vocational training provided free of charge to students. 

Background 

Both colleges are incorporated further education corporations under the Further and Higher Education Act 1992. Each is categorised as a general further education college and registered for VAT. As such, they are regarded as eligible bodies under Item 1 Group 6 of Schedule 9 VATA 1994, which provides exemption for the supply of education and vocational training. 

During the periods in question, the colleges received the bulk of their funding from government agencies including the Education Funding Agency (EFA) and the Skills Funding Agency (SFA). These bodies later merged into the Education and Skills Funding Agency (ESFA). The funding supported courses provided free of charge to eligible students across a wide range of age groups and circumstances. Students not eligible for funding paid tuition fees directly to the colleges. 

HMRC raised assessments for output tax adjustments under the Lennartz mechanism, arguing that the grants amounted to consideration for taxable supplies. 

The legal issue: the “Consideration Point” 

The question before the Tribunal was whether, for VAT purposes, the grants should be treated as consideration within the meaning of section 5(6)(a) VATA 1994 and Article 2(1) of the VAT Directive. Put simply, was government funding in substance payment for a supply of services to students, even though those students received education free of charge? 

If the grants did not represent consideration, HMRC’s assessments would fall away. 

Tribunal decision 

The Tribunal held in favour of the colleges. In reaching its decision, the FTT acknowledged that it was bound by previous rulings including the Upper Tribunal decision in Colchester Institute Corporation (CI). That case, as well as earlier First tier Tribunal decisions, confirmed that government funding agency grants are not consideration for a supply of education or vocational training. 

Accordingly, the output tax assessed under the Lennartz mechanism was not due, and both Derby College and Cornwall College succeeded in their appeals. 

Wider implications 

It is important to note that HMRC has reserved its position on this point, and the Court of Appeal will revisit the issue in Colchester Institute in June 2026. Until that judgment is handed down, the current legal position remains that government funding agency grants do not constitute consideration for VAT purposes. 

For the further education sector, this decision provides continued certainty that the receipt of ESFA funding does not give rise to unexpected VAT liabilities. However, with HMRC continuing to challenge the principle, colleges and training providers should remain alert and seek advice where needed. 

HMRC UPDATES 

HMRC Update. VAT Registration: Effective Date of Registration (EDR) 

HMRC has recently clarified its policy on the Effective Date of Registration (EDR) where businesses register for VAT voluntarily. 

When registering voluntarily, a business chooses the date from which it becomes VAT registered. This date is important because it determines: 

• From when VAT must be charged on sales 

• What pre-registration costs can be recovered 

However, if a business later realises it selected the wrong date.  Perhaps choosing a date too early or too late.  There is no statutory right of appeal or review to change it. The law places the responsibility on the business to make the correct choice at the outset. 

HMRC has confirmed that: 

• Requests to amend a voluntary EDR will only be considered in exceptional circumstances. 

• If a mistake affects pre-registration VAT recovery, this cannot normally be corrected later. 

• Businesses who believe HMRC’s decision is unfair or unreasonable still have the option of pursuing a Judicial Review, though this is a complex and costly process. 

To help businesses avoid problems, HMRC has updated both its public guidance and the VAT Registration Manual. These updates aim to: 

• Make the rules around choosing an EDR clearer. 

• Set out the limited situations where a retrospective amendment request might be accepted. 

• Encourage businesses to carefully assess their VAT position before applying. 

Key takeaway: Businesses registering voluntarily must give serious thought to their chosen effective date, as mistakes can have lasting financial consequences. 

HMRC Update. Excise Notice 179: Motor and Heating Fuels 

HMRC has updated Excise Notice 179: Motor and heating fuels, general information and accounting for excise duty and VAT. 

The Notice sets out the key requirements and obligations for UK warehousekeepers handling motor and heating fuels. 

Recent changes include: 

• Section 4.6.1: clarification of the correct HMRC contact for enquiries about the HM39 document. 

• Section 4.10.5: updated guidance on how temperature and pressure measurements must be applied when calculating oil volumes for excise duty. 

These updates reinforce the importance of accurate documentation and measurement in ensuring compliance with excise duty and VAT rules. 

VAT Articles 

We’ve just published a new Community Infrastructure Levy (CIL) Fact Sheet for homeowners and developers. It gives an overview of what CIL is, when it might apply, and the key things to be aware of.

Breaking Down the Changes in VAT Penalties 

HMRC’s VAT penalty regime has undergone major reform. Since January 2023, late submission and late payment rules have moved to a new points based system, replacing the old default surcharge. 

From April 2025, penalties have become much tougher:. 

• Late VAT payments incur steeper charges, with 3% penalties at day 16 and 30, and daily penalties from day 31 onwards. 

• Interest rates on late VAT have risen to the Bank of England base rate + 4%. 

This means even short delays can quickly become costly. 

📌 Read the full article on our website for a detailed breakdown of the new regime, practical compliance tips, and how Deeks VAT Consultancy can support your business. 

Contact Jane Deeks at Deeks VAT Consultancy for professional advice across all industries, including expert guidance on VAT on consultancy services UK businesses need to stay compliant and tax-efficient.

jane@deeksvat.co.uk| 07710553831 | LinkedIn