Employment taxes
Lead appeals in a tax avoidance scheme dismissed by the FTT
The First-tier Tribunal (FTT) found for HMRC in case on mass-marketed tax avoidance scheme on contractor loans.
Over 700 taxpayers participated in a scheme known as Rathowen. The basis was that companies for which individuals based in the UK were working as contractors did not pay them directly but put money into a network of companies. The individuals received a small payment from an Isle of Man (IoM) company, and a larger interest free loan, from another IoM company. The individuals declared that they were self-employed and included a note on their returns about the loan explaining their view that the loan was not subject to UK tax.
HMRC issued closure notices and contended before the FTT that the loans formed part of income arising from self-employment. Ten of the individuals were the lead appeals for the group at this hearing.
The FTT found for HMRC. This was a tax avoidance scheme designed to avoid some consequences of the IR35 rules. All participants had joined a scheme related to the UK-IoM double tax treaty through partnerships, then been migrated to the Rathowen arrangements. The end clients for whom the individuals were working were not informed of the scheme. The individuals’ arguments that the amounts received by way of loan were not taxable as trading income, or should be reduced for expenses (the scheme fees), were not upheld.
The FTT, as in other similar cases involving disguised remuneration, gave the taxpayers’ arguments relatively short shrift. Assuming there is no further appeal, it does not seem as though the appellants can avail themselves of the new loan charge settlement opportunity announced in the Autumn Budget 2025, as that explicitly excludes cases which are in the Tax Tribunal process.
From Tax Update January 2026, published by S&W Partners LLP
Further information
VAT
Books or ghost-writing services?
Story Terrace Limited produced biographies for customers, using ghost writers. Story Terrace considered that it was supplying books, which were zero-rated for VAT purposes. HMRC was of the view that Story Terrace was making standard-rated supplies of ghost-writing services. The First-tier Tribunal (FTT) has agreed with Story Terrace.
The FTT reviewed the evidence, including Story Terrace’s website, the contract with customers, and the relative costs of the ghost writers. The FTT considered that “the typical consumer would regard the provision of the book as qualitatively the most important element of the Appellant’s supply”. Accordingly, the provision of the book was the predominant element of Story Terrace’s supply. The FTT upheld Story Terrace’s appeal.
From the Weekly VAT News dated 19 January 2026, published by Deloitte
VAT and transfer pricing
Stellantis Portugal, S.A. (SP), based in Portugal, is a company operating in the motor trade and formerly part of the General Motors Group (GMG). SP purchased vehicles from GMG manufacturers, which it then resold to independent Portuguese motor vehicle dealers. In the event of manufacturing defects, the final customer went to the dealer to have them repaired, with the dealers charging SP the relevant costs. Under the terms of the transfer pricing (TP) contract concluded between GMG and SP, SP informed the GMG manufacturers of the costs of distributing the vehicles, including the cost of any repairs, as well as operating costs, and accordingly a positive or negative adjustment was made to the price of the vehicles sold to SP to arrive at the operating profit target. The Portuguese tax authorities were of the view that the GMG manufacturers were responsible for the repairs, and that the passing on of the costs by SP constituted a supply of services chargeable to VAT.
Advocate General Kokott has disagreed. In her opinion, AG Kokott notes that TP rules are a direct tax mechanism to allocate the profits from one intra-group entity to another. That is not, in principle, relevant for the purposes of VAT law which is generally based on the existence of a supply for consideration. The relevance of a TP adjustment from a VAT perspective depends on what it relates to and how it is made. A TP adjustment made by means of separate (non-fictious) supplies of services for consideration constitute taxable transactions for VAT purposes. However, as in the case of SP, where the TP adjustment is made by means of an agreed variation to the sales price of a specific supply of goods, this is either a reduction or an increase in the taxable amount of the supply made. It cannot itself constitute a supply of services for consideration by the purchaser of the goods.
From the Weekly VAT News dated 19 January 2026, published by Deloitte
Attribution of input tax
Members of the Littlewoods Limited VAT group (Littlewoods) are online retailers. Littlewoods also makes supplies of financial services, namely financing of purchases and insurance cover for products purchased. Littlewoods made claims to HMRC to recover in full input tax incurred on the costs of photographing specific products for their websites. HMRC refused the claims, on the basis that an apportionment was required, as the costs were incurred to promote both (taxable) retail sales and (exempt) financial services.
The First-tier Tribunal (FTT) has upheld Littlewoods’ appeal, finding that the costs were properly attributed to Littlewoods’ taxable supplies only. The FTT noted that the majority of Littlewoods’ customers chose a payment method that did not involve the payment of interest, unlike the circumstances in the case of N Brown, a FTT decision that also concerned an online retailer offering credit for purchases. Irrespective of that point of difference, the FTT considered the tribunal in N Brown applied the wrong legal test, by looking at whether there was a direct link between inputs and outputs on a “business macro level”, instead of on a “micro transactional level” as favoured in the later Court of Appeal judgment in the case of Royal Opera House.
The FTT considered that the photographs displayed the products for sale, and did not promote the credit or insurance services, and concluded that the photography costs were incurred exclusively in the making of taxable supplies of the retail goods. Any link to the exempt financial services of credit or insurance was “at the most, indirect but … probably non-existent”. The FTT allowed Littlewoods’ appeal.
From the Weekly VAT News dated 12 January 2026, published by Deloitte
VAT recovery on fundraising share sale
To fund the development of a new hotel in Milton Keynes, Hotel La Tour Ltd (HLT) sold its existing hotel in Birmingham by way of the sale of shares in a subsidiary which owned the hotel. HLT sought to recover the VAT incurred on the marketing and legal costs associated with the sale on the basis that the relevant services were directly and immediately linked to its downstream taxable activities, namely developing and operating the new hotel. HMRC denied VAT recovery on the basis that the costs related to the exempt share sale. The First-tier Tribunal (FTT) and the Upper Tribunal (UT) found in HLT’s favour, and the Court of Appeal (CA) found in favour of HMRC. The Supreme Court (SC) has upheld the CA’s judgment.
The SC found that there was a direct and immediate link between the inputs and the sale of the shares, rather than the overall business, and since that share sale was exempt, the VAT was not deductible. The SC agreed with the CA that the FTT and UT erred in their application of case law, by relying on the way in which the price of the shares was set (the ‘costs component’ concept) to reject the possibility of a direct and immediate link between the inputs and the share sale. The SC also rejected HLT’s argument that recent Court of Justice of the European Union (CJEU) jurisprudence has erased the distinction between exempt and out of scope share sales. Further, the SC confirmed that recent CJEU cases had not modified the direct and immediate link as it applies to share sales to focus on the purpose of the transaction, ie, what the funds were to be used for. Finally, the SC dismissed HLT’s argument that, as HLT’s supplies of management services to its subsidiary were “disregarded” as intra-VAT group, the share sale was outside the scope of VAT and that the fees were directly and immediately linked to the overall business. The SC dismissed HLT’s appeal.
From the Weekly VAT News dated 19 December 2025, published by Deloitte
VAT treatment of rotisserie chickens
WM Morrison Supermarkets Limited considered that sales of its cool-down rotisserie chickens (CDRCs) were zero-rated for VAT purposes, and appealed HMRC’s assessments for VAT at the standard rate. Morrisons argued that the supply of CDRCs was zero-rated as the supply of food, and not excluded from zero-rating as a supply in the course of catering, as although the CDRCs were above ambient temperature at the time of supply, and therefore ‘hot’, they did not fall foul of any of the five ‘hot food’ tests in Note (3B) of Group 1 of Schedule 8, Value Added Tax Act (VATA) 1994. It also argued that, following stores visits and the supply of detailed information when CDRCs were introduced, HMRC were content that zero-rating was correct, and that had given rise to a legitimate expectation that Morrisons could rely on.
The First-tier Tribunal (FTT) has held that CDRCs are standard rated due to the role of the bags in which the CDRCs were packaged. The FTT concluded that the effect of bags, which had a plastic lining designed to prevent leakage, was that the CRDCs had “been kept hot after being heated” and were “provided … in packaging that retains heat, (whether or not the packaging was primarily designed for that purpose)” or that the bags were “specifically designed for hot food”, meaning that they failed two of the five hot food tests. The FTT went on to consider Morrisons’ legitimate expectation argument, while acknowledging that determining the extent of its jurisdiction was a “vexed and difficult” question given previous conflicting case law. The FTT considered that “HMRC did not give clear and unambiguous rulings … that CDRCs were zero-rated, which Morrisons had a legitimate expectation it could rely on”. The FTT dismissed Morrisons’ appeal.
From the Weekly VAT News dated 19 December 2025, published by Deloitte
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
