V@ update - March 2025

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

News

• James Murray, Exchequer Secretary to the Treasury, has set out in a speech the government's vision for the future of the UK tax authority. Amongst various key issues, Mr Murray discussed electronic invoicing and the simplification of customs procedures.
  
  A transcript of his speech can be viewed here.
  
  
• HMRC's consultation to gather views on standardising electronic invoicing and how to increase adoption of e-invoicing across UK businesses and the public sector (which was published on 13 February 2025), will close on 7 May 2025.
  
  Details of the consultation can be viewed here.
  
  

• HMRC has published the second estimate of the VAT gap for 2023 to 2024, following the Chancellor' statement to Parliament.
  
  The estimate of the VAT gap can be viewed here.

Case reports

Chris Poulton v HMRC [2025] UKFTT 240 (TC)

In this case, the First-tier Tribunal (FTT) considered whether the 'Reemtsma' principle applied post-Brexit in the context of a strike out application made by HMRC.

The Reemtsma principle was established in Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze (Case C-35/06). It provides that, in order to give effect to the EU law principle of effectiveness, a third party may be able to make a claim for incorrectly paid VAT against the relevant tax authority where it was impossible or excessively difficult to reclaim it from the relevant contractor.

Chris Poulton built a custom self-build house and paid a contractor, Hill Plant and Groundworks Ltd (HPG) for groundworks. Mr Poulton paid £9,959.84 in VAT on HPG's services, but it was later discovered that the services were zero-rated and HPG was not entitled to charge VAT. Mr Poulton tried to recover the VAT through court proceedings, but HPG had gone into voluntary liquidation.

Mr Poulton then sought to reclaim the VAT from HMRC under the Reemtsma principle. HMRC accepted that, in principle, a third party such as Mr Poulton could have relied on the Reemtsma principle prior to Brexit, but following the UK's withdrawal from the EU rights of action based on a failure to comply with the general principles of EU law, such as effectiveness, had been removed. Accordingly, HMRC applied to strike out Mr Poutlon's claim.

The FTT dismissed HMRC's application to strike out Mr Poulton's appeal and held that Mr Poulton had a realistic, as opposed to fanciful, prospect of succeeding in an argument that section 28, Finance Act 2024, had the effect of preserving Reemstma claims in respect of VAT and excise duties.

Why it matters:

Although this case relates to a relatively small sum, a substantive judgment on whether Reemtsma has survived Brexit will have much wider significance. This case also acts as a reminder of HMRC's duties when a taxpayer is self-represented. The FTT (Judge Nicholas Aleksander) was highly critical of HMRC for not drawing section 28, Finance Act 2024, to Mr Poulton's attention, and even invited Mr Poulton to make an application for costs against HMRC on the basis of HMRC's unreasonable conduct.

The decision can be viewed here.

DJJ Services Ltd v HMRC [2025] UKFTT 255 (TC)

In this case, the FTT considered appeals against HMRC's application of the Kittel and Ablessio principles, in the context of VAT fraud.

Kittel

The Kittel principle was established by the Court of Justice of the European Union in Axel Kittel v Belgian State (C-439/04) and was elaborated on by the Court of Appeal in Mobilx Ltd v HMRC [2010] EWCA Civ 517. It provides that a tax authority can deny input tax deductions when the following conditions are satisfied:

1. there was fraudulent evasion of VAT;
2. the appellant’s purchases on which input tax have been denied were connected with that fraudulent evasion of VAT; and
3. the appellant knew, or should have known, that its purchases were connected with fraudulent evasion of VAT.

The taxpayer in this case, DJJ Services Ltd (DJJ) accepted that its purchases were connected with fraudulent evasion of VAT but argued that HMRC had failed to demonstrate that it knew, or should have known, about the connection.

The FTT dismissed DJJ's appeal in respect of the Kittel principle, finding on the balance of probabilities that DJJ knew the relevant transactions were connected to fraud, referring to the following factors:

• DJJ was supplied by nine defaulting traders consecutively;
• DJJ had no prior experience or knowledge of supplying labour in the construction industry and there was no clear account of why it entered that industry;
• DJJ had a general awareness of fraud in the supply chains in which it operated;
• DJJ did not undertake any meaningful due diligence or commercial negotiations; and
• DJJ continued to trade with a supplier after being informed of their deregistration.

Ablessio

In Impact Contracting Solution Ltd v HMRC [2023] UKUT 215 (TCC), the Upper Tribunal held that the Ablessio principle: "enable[s] the deregistration of a person for VAT purposes who has facilitated the VAT fraud of another, where the person to be deregistered knew or should have known that it was facilitating the VAT fraud of another”.

In reliance on the Ablessio principle, HMRC de-registered DJJ for VAT. DJJ appealed the decision, arguing that the Ablessio principle only applies when a taxpayer themselves misuse their VAT number, not when it is misused by another.

As the FTT had found that DJJ knew the transactions entered into were connected to fraud, it had no difficulty in also finding that DJJ had facilitated the VAT fraud of another and therefore dismissed DJJ's appeal.

Why it matters:

This decision provides helpful clarification of the factors the FTT will consider when determining whether a taxpayer knew, or should have known, that its purchases were connected with the fraudulent evasion of VAT.

The decision can be viewed here.

Advanced Hair Technology Ltd v HMRC [2025] UKFTT 241 (TC)

In this case, the FTT considered whether hair transplant services provided by Advanced Hair Technology Ltd (AHT) qualified for VAT exemption as "medical care".

AHT specialises in hair restoration surgeries, primarily treating androgenetic alopecia (AGA), commonly known as male pattern baldness. AHT argued that its services centred on the restoration of its patients' health, thereby qualifying for VAT exemption as medical care. HMRC contended that these procedures were primarily cosmetic, focusing on improving the patient's appearance rather than treating a medical condition.

As such, the core issue for the FTT was the interpretation of "medical care", for VAT purposes. There is no statutory definition of "medical care". The FTT considered whether AHT's hair transplant procedures served a therapeutic purpose (i.e. treating a disease or health disorder) or were primarily for cosmetic enhancement.

The FTT found that hair transplant services did not qualify for VAT exemption. While AGA was acknowledged as a common condition affecting a significant portion of the male population, the FTT noted that it is often considered a normal part of aging rather than a disease requiring medical intervention. The FTT determined that the primary purpose of the hair transplant procedures was cosmetic, with insufficient evidence to suggest that the treatment addressed psychological or psychiatric conditions. Patients sought the procedures mainly to improve appearance and self-confidence, which the FTT did not equate with restoring health. However, the FTT did note that the VAT exemption for medical care should be assessed on a case-by-case basis. For example, hair transplant treatments resulting from trauma, such as hair loss due to radiotherapy, might qualify for exemption as part of comprehensive medical care.

The FTT therefore upheld HMRC's decision and ruled that AHT's services were subject to standard rate VAT.

Why it matters:

This decision highlights the need to carefully evaluate the principal purpose of treatments when considering VAT exemptions, distinguishing between therapeutic medical care and cosmetic procedures. The decision offers further guidance on how the FTT is likely to interpret the definition of "medical care".

The decision can be viewed here.