V@ update - January 2025

Welcome to the January 2025 edition of RPC's V@, our monthly update which provides news and analysis from the VAT world.

News

• The Independent Schools Council (ISC) has launched legal action against the government's decision to levy VAT on independent school fees. The High Court has indicated that the case will be fast-tracked amid concerns that the human rights of children are being breached. 
  
  The ISC's press release can be viewed here.
  
  
• HMRC have published guidance on the basic VAT treatment of cladding remediation works. The guidance states that cladding remediation works which are carried out on existing residential buildings can be zero rated for VAT. 
  
  HMRC's guidance can be viewed here. 
  
  
• HMRC have sent One-To-Many letters to a select number of VAT registered charities (those with up to £2m in turnover) to raise awareness in the small VAT registered charities sector of the obligation to complete business/non-business apportionment calculations. 
  
  The Chartered Institute of Taxation's press release can be viewed here.

Case reports 

Global by Nature Ltd v HMRC [2025] UKFTT 24 (TC)

In this case the First-tier Tribunal (FTT) considered whether certain powdered food products were standard-rated as "sports drinks", under excepted Item 4A of Group 1, Schedule 8, Value Added Tax Act 1994. Global by Nature Ltd (GBN) argued that its Sunwarrior protein powders should be zero-rated as food, while HMRC contended they were standard-rated because they were marketed as enhancing physical performance, accelerating recovery, or building bulk.

HMRC had previously accepted that GBN’s Hemple products were zero-rated, but maintained that the Sunwarrior products fell within Item 4A. GBN appealed, arguing that the Sunwarrior protein powders did not meet the definition of "sports drinks" and that their primary function was as a general food supplement.

The FTT allowed GBN's appeal, finding that the Sunwarrior products were not "sports drinks" within the meaning of Item 4A. In the FTT's view,  for a product to qualify as a "sports drink," it must contain significant carbohydrates and electrolytes to aid post-exercise recovery, which the Sunwarrior products did not.

Although the packaging and marketing of the product included references to fitness, in the view of the FTT, the overall messaging emphasised general nutrition rather than sports-specific benefits. The FTT also noted that GBN did not market its products primarily to gyms or sports professionals, further supporting its classification as general food products rather than specialised sports nutrition.

Why it matters:

This decision clarifies that a product’s VAT classification depends not only on how it is marketed but also on its actual composition and intended use. Businesses selling protein powders and other similar supplements should carefully assess their VAT treatment to determine if they fall within excepted Item 4A, or qualify for zero-rating as food.

The decision can be viewed here.

Align Technology Switzerland GmbH & another v HMRC [2024] UKFTT 1100 (TC)

In this case, the FTT considered whether HMRC's decision to withdraw VAT assessments prevented it from having jurisdiction to hear an appeal on the underlying issues.

The appellants made supplies of Invisalign clear aligners (Aligners) in the UK.

On 9 June 2023, HMRC sent a letter to the appellants stating that its view of the matter was that Aligners were chargeable to VAT at the standard rate. On 21 September 2023, 18 December 2023 and 23 February 2024, HMRC issued VAT assessments to the appellants on this basis (the VAT Assessments).

The appellants challenged the VAT Assessments both by way of an appeal to the FTT and by judicial review proceedings. Shortly before the hearing in the judicial review claim, the parties entered into a settlement agreement under which HMRC agreed to withdraw the VAT Assessments.

After the settlement agreement was finalised, the appellants wrote to HMRC requesting confirmation that HMRC now agree that supplies of Aligners was exempt from VAT.

HMRC stated that its view of the matter, as stated in its letter of 9 June 2023, remained unaltered and it had simply agreed to withdraw the VAT Assessments. HMRC further argued that the FTT did not have jurisdiction to consider and rule on that underlying decision because the appellants' existing appeals only related to the VAT Assessments, which HMRC had agreed to withdraw.

A case management hearing was held before the FTT on this issue. The FTT agreed with HMRC that it had only agreed to withdraw the VAT Assessments and that should not be taken to mean its underlying decision would also be withdrawn.

However, the FTT concluded that since the underlying decision had not been withdrawn, the FTT retained jurisdiction to hear arguments in relation to whether supplies of Aligners in general were standard or zero-rated supplies. The FTT therefore directed that a substantive hearing should be held to determine the issue.

Why it matters:

This decision should be borne in mind by any taxpayers seeking to enter into a settlement agreement with HMRC. In this case, HMRC successfully relied on the fine distinction between a decision on liability and a decision  enforcing that liability. Any settlement agreement should be drafted to expressly remove any such distinction.

The decision can be viewed here.

HMRC v Colchester Institute Corporation [2024] UKUT 397 (TCC)

This case is unusual in that it primarily concerns HMRC's desire to argue  its appeal before the Court of Appeal rather than the Upper Tribunal (UT).

The underlying substantive issue concerned the VAT treatment of payments received by Colchester institute Corporation (CIC). The issue had been determined by the UT in Colchester Institute Corporation v HMRC [2020] UKUT 368 (TCC), which had concerned different periods but materially similar facts relating to grant-funded education and training (the 2020  Decision). In the 2020 UT Decision, the UT ruled in CIC’s favour and, applying the Court of Justice of the European Union's decision in Le Rayon d'Or (Case C-151/13), held that the payments amounted to consideration for supplies.

HMRC did not seek to argue the substantive issue before the UT, as the 2020 Decision was binding on the UT. HMRC wished to appeal to the Court of Appeal and argue its case in substance before that court.

CIC did not object to such a course of action and the UT was persuaded by HMRC's approach on the basis that it would save judicial time and resource and avoid the confusion of potentially two conflicting UT decisions. The UT dismissed HMRC's appeal.

However, the UT noted that HMRC’s strategy of reserving arguments for the Court of Appeal carried risks, particularly if permission to appeal was denied. Whilst both parties and the UT accepted that there would be no argument before the UT and that the UT would simply dismiss HMRC's appeal, the UT did not immediately grant permission to appeal (it would appear from the decision that HMRC did not formally apply for permission to appeal). HMRC must therefore submit an application for permission to appeal to the UT within the usual time period for such applications (leaving it open for another UT judge to refuse permission).  

Why it matters:

This case is very unusual in that HMRC has sought, in effect, to leapfrog the UT and take its appeal from the FTT to the Court of Appeal. Although, the UT was persuaded by HMRC's approach, there is the potential risk for HMRC that permission to appeal may ultimately be refused and HMRC will have lost the opportunity to argue its case and persuade the UT that the 2020 Decision was wrongly decided.

The decision can be viewed here.