Corporation tax
Tax overpayment claim on foreign income found to be within time limit
The Court of Appeal upheld the decision of the High Court that the trigger point for the overpayment claim was a later date than HMRC had argued. The taxpayer had therefore made their claim for the overpayment of corporation tax paid within the relevant time period.
The taxpayer sought to recover overpaid corporation tax on dividends received by a UK company from a non-UK company, which both the taxpayer and HMRC had believed to be payable at the time. It transpire that the domestic tax regime was not compatible with EU law exposing the taxpayer to a higher tax liability.
The recovery of the overpaid tax was time-barred six years after the mistaken payment was made, however there was an alternative trigger for the commencement of the limitation period within the Limitation Act 1980 – “the period of limitation shall not begin to run until the plaintiff has discovered the… mistake… or could with reasonable diligence have discovered it.”
HMRC and the taxpayer had conflicting dates for when they believed the taxpayer had sufficient knowledge of the mistake, with HMRC’s being much earlier.
The Court of Appeal has upheld the High Court’s decision and confirmed that the claims were made within the appropriate time limit on the basis the taxpayer’s later date was fully justified.
BAT Industries Plc and Ors v HMRC [2025] EWCA Civ 1271
From Tax Update October 2025, published by S&W Partners LLP
Employment taxes
Appeals dismissed on PAYE and employer NICs
The First-tier Tribunal (FTT) has found that money did not have to be at an employee’s absolute disposal to be classed as earnings for income tax and national insurance contributions (NIC) purposes under the definitions in the legislation.
Two companies used a marketed tax avoidance scheme which claimed that monies could be transferred to employees free from income tax and NICs and that a corporation tax deduction would be obtained. The monies were amounts credited to the loan accounts of employees and directors. HMRC argued that income tax and NICs should be charged as the payments were ‘earnings’ under the legislation.
The FTT found for HMRC. The taxpayer argued that the payments were not earnings, as the recipients were required to return the payments. HMRC stated that this was not so, rather the payments were made subject to an obligation to use 1% of the payments to subscribe for shares, and the FTT agreed. It also found that money did not have to be at an employee’s absolute disposal to be earnings. The payments were also of value, despite a contingent liability to repay uncalled amounts on shares (the shares themselves were found to have no commercial purpose or real value).
GW Martin & Co Ltd & Anor v HMRC [2025] UKFTT 1147 (TC)
From Tax Update October 2025, published by S&W Partners LLP
VAT
Interest on VAT element
In the case of Pharos Offshore Group Ltd v Keynvor Morlift Ltd, the High Court has handed down a judgment dealing with consequential matters following the main judgment in a contract dispute whereby the High Court determined that the amount owed to Pharos, after setting off KML’s counterclaim, net of interest, was £495,668.68 inclusive of VAT. Of the five matters of principal to be determined, two related to VAT. Firstly, whether interest is payable on the VAT amount, and secondly, the resultant application of Part 36 of the Civil Procedures Rule (CPR36) which deal with issues of an ‘offer to settle’.
In respect of the first matter, the High Court concluded that VAT is part of the consideration, and therefore a qualifying debt within the meaning of the Late Payment of Commercial Debts (Interest) Act 1998 (the LPA). This meant that interest accrued on the VAT element. The fact that the definition the ‘Contract Price’ in this case excluded VAT did not mean that the VAT is excluded from the contractual obligation and therefore the qualifying debt. In respect of the second matter, the HC considered that the purpose of the CPR36 regime is to incentivise settlement. It found no basis to interpret CPR36 in a way that would exclude the VAT element from the "sum of money awarded", especially since the rules specifically excludes interest, not VAT. Therefore, the Court concluded that the enhanced interest rate under CPR36 applies to the entire sum, including the VAT element.
Pharos Offshore Group Ltd v Keynvor Morlift Ltd [2025] EWCH 2496 (TC)
From the Weekly VAT News dated 13 October 2025, published by Deloitte
Input tax apportionment methodology
The Hippodrome in Leicester Square has casinos, bars and restaurants, and a theatre. In 2022, the First-tier Tribunal (FTT) agreed with Hippodrome Casino Ltd (HCL) that a floorspace-based standard method override (which improved HCL’s input tax recovery) was a better reflection of the use of HCL’s costs than the standard method, based on turnover. This was essentially on the basis that there was little crossover between the casinos (VAT exempt) on one hand, and the bars, restaurants, and theatre (taxable) on the other. The Upper Tribunal (UT) overturned this decision. The Court of Appeal (CA) has now upheld the UT’s decision unanimously.
The CA found that the UT was correct to find material error in the FTT’s decision, and to set it aside. The CA considered that the FTT had failed to address HMRC’s core argument; that the areas designated as relating to taxable activity in HCL’s override calculation had a dual use, that is, the bar, restaurant, and theatre areas also economically supported and promoted gaming. The CA went on to find that, having set aside the FTT’s decision, the UT was also correct to remake the decision in HMRC’s favour. The standard method can only be overridden by another method that gives rise to a more precise result. The UT correctly identified this as the issue and concluded that the floorspace method was not a more precise measure than the standard method. The CA also rejected HCL’s argument that UT should have “left [the door] open for further argument” if it was not persuaded by the floorspace method. The standard method applied by default, and HCL had failed to displace it.
Finally, the CA agreed with HMRC that the input tax restriction on business entertainment expenditure must be applied to the pot of residual input tax, before the standard method is applied. The CA dismissed HCL’s appeal, thereby confirming the application of the standard method apportionment.
Hippodrome Casino Ltd v HMRC [2025] EWCA Civ 1259
From the Business Tax Briefing dated 10 October 2025, published by Deloitte
VAT treatment of supplies of locum doctors
HMRC issued a decision in August 2021 to Isle of Wight NHS Trust (the Trust) that the supply of locum medical practitioners to the Trust by agencies was not an exempt supply under Item 5, Group 7, Schedule 9, VATA 1994, which exempts “the provision of a deputy for a person registered in the register of medical practitioners”. The Trust’s appeal against the decision was designated as a lead case, with 20 appeals stayed behind it. The First-tier Tribunal (FTT) has held that the exemption applied.
Having first determined a number of preliminary/procedural issues, the FTT found that Item 5, according to its ordinary meaning, exempts the supply of a deputy, that is, a person appointed to act on another’s behalf, where that other person is registered in the register of medical practitioners. Nothing in the legislative or historical context to the taxation of such deputising services disapplies this ordinary meaning. The FTT also found that Item 5 is ultra vires the EU Principal VAT Directive (PVD), as it exempts a supply of staff and not the supply of medical care.
The FTT concluded that it was not possible to apply a conforming interpretation (the Marleasing principle) to interpret Item 5 in accordance with the PVD (disagreeing with the FTT in Rapid Sequence Limited). To interpret Item 5 as requiring the provision of medical care would be contra legem (against the law). The FTT applied this interpretation of Item 5 to the facts before it, and concluded that, on the basis of the evidence provided, the Trust had received services that should have been treated as exempt. The FTT allowed the Trust’s appeal.
Isle of Wight NHS Trust v HMRC [2025] UKFTT 1114 (TC)
From the Weekly VAT News dated 29 September 2025, published by Deloitte
VAT liability of nitrous oxide for culinary use
Telamara Limited supplied nitrous oxide (N2O) in canisters intended exclusively for culinary use as cream chargers, used for whipping cream and making foams and mousses, etc. Telamara considered that the supply of the N2O canisters should be zero-rated for VAT purposes as food. HMRC disagreed, and assessed Telamara for VAT.
The First-tier Tribunal (FTT) has held that N2O was not food. The FTT noted that N2O is a gas, incapable of being eaten or drunk. While the FTT considered that N2O is not nutritious, it noted that zero-rating can apply to the supply of substances that are not nutritious in themselves, but are used as ingredients, such as bicarbonate of soda. However, N2O was “materially dissimilar” to bicarbonate of soda, which is combined with other ingredients to produce a different food product, unlike N2O, which merely changes the form of the cream. Although N2O is recognised as a food grade additive, this does not determine the VAT treatment. The FTT dismissed Telamara’s appeal.
Telamara Limited v HMRC [2025] UKFTT 1123 (TC)
From the Weekly VAT News dated 29 September 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.
