Corporation tax

Tax treatment of penalties

The Court of Appeal (CA) has ruled that redress payments made to customers following an investigation by a regulatory body were not fines or penalties. There is, therefore, no legal foundation to prevent their deduction.

The taxpayer was investigated by Ofgem for mis-selling, complaints handling, and cost transparency. The company was fined a nominal £1 and agreed to pay £28m in redress to affected customers. The taxpayer sought tax relief for these payments as business expenses. HMRC denied the relief, arguing the payments were penalties and under established case law such payments are not deductible.

The First-tier Tribunal had allowed relief for some payments, a decision overturned by the Upper Tribunal (UT), which denied relief in full. The CA has now reversed the UT’s decision, allowing relief for all payments except the £1 fine. The CA held that the payments were not penalties but were made to settle regulatory investigations, and as such there was no basis in law to prohibit their deduction.

This decision narrows the scope of disallowing expenditure related to penalties and provides important insights into the deductibility of such payments.

ScottishPower (SCPL) Limited v HMRC [2025] EWCA Civ3

From Tax Update January 2025, published by Evelyn Partners LLP

Partnership taxation

HMRC’s appeal on LLP salaried members legislation allowed

HMRC’s appeal in the limited liability partnership (LLP) ‘salaried members’ legislation case of BlueCrest Capital Management (UK) LLP and others has been unanimously allowed by the Court of Appeal. The case concerned the rules enacted in 2014 that, if three statutory conditions are all met, can lead to certain individual members of an LLP being treated for income tax and national insurance contributions purposes as an employee receiving a salary, rather than as a self-employed partner. The appeal focused on ‘Condition B’ – whether the relevant “mutual rights and duties” of the members and the LLP give an individual “significant influence over the affairs of the partnership”. 

The Court of Appeal found that the lower Tribunals had misinterpreted Condition B when, in addition to considering the LLP Agreement and any other sources of legally enforceable rights and duties, they unduly considered influence derived from more informal or de facto arrangements in place (whether or not enforceable). The Court has remitted the case back to the First-tier Tribunal to reconsider the application of Condition B based on the Court’s analysis of the law. The Court also dismissed an argument raised in cross-appeal in relation to ‘Condition A’; the extent to which amounts received were fixed or variable by reference to the LLP’s overall profits. The Court held that the Tribunals were right to hold that Condition A was satisfied by the members.

HMRC v Bluecrest Capital Management (UK) LLP [2025] EWCA Civ 23

From the Business Tax Briefing dated 24 January 2025, published by Deloitte

VAT

TOMS on short-term accommodation 

Sonder Europe Limited (Sonder) leased apartments from landlords for between two and 10 years, which it supplied to travellers for periods of one night to a month. Sonder furnished some apartments, and in some cases undertook minor decorating work. The First-tier Tribunal (FTT) held that Sonder’s services were subject to VAT under the tour operators’ margin scheme (TOMS). The Upper Tribunal has upheld HMRC’s appeal against the FTT decision, and held that TOMS did not apply. 

For TOMS to apply, the EU Principal VAT Directive requires that a supply acquired by a travel agent must be supplied onward “for the direct benefit of the traveller” and the Value Added Tax (Tour Operators) Order 1987 requires that the onward supply must be made “for the benefit of a traveller without material alteration or further processing”. The FTT decision was based on its finding that Sonder did not materially alter or process the apartments. The UT found that the FTT was in error, as it did not have regard to whether the services bought in by Sonder were supplied to it for the direct benefit of travellers. 

The UT also considered that the FTT had mischaracterised the nature of the supplies, focusing on the physical alterations to the apartments, rather than the underlying interests in land supplied by landlords to Sonder and by Sonder to travellers. Therefore, the UT proceeded to remake the decision, and considered that the services supplied by Sonder (short-term leases to occupy property as holiday accommodation) were materially altered from those supplied to Sonder by the landlords (interests in land for a period of years). Accordingly, the services supplied by landlords to Sonder were not for the direct benefit of Sonder’s customers, and Sonder’s services were not supplied for the benefit of the traveller without material alteration and further processing. Sonder was not making onward supplies of bought-in services, but was making supplies of its own ‘in-house’ services, which fell outside the ambit of TOMS. 

HMRC v Sonder Europe Limited [2025] UKUT 14 (TCC)

From the Weekly VAT News dated 20 January 2025, published by Deloitte

Whether products are sports drinks

Global by Nature Limited (GBN) sold food supplements under various brand names, including Sunwarrior. GBN submitted a claim for overdeclared output tax on the basis that certain of its products should be properly zero-rated for VAT purposes as food. On review, HMRC disagreed in respect of some of the products, holding that Excepted Item 4A, Group 1, Schedule 8, Value Added Tax Act 1994 applied, which excepted from zero-rating “Sports drinks that are advertised or marketed as products designed to enhance physical performance, accelerate recovery after exercise or build bulk …”. 

The First-tier Tribunal (FTT) has agreed with GBN. HMRC’s position was that drinks were sports drinks if they were advertised and marketed as such. However, the FTT agreed with GBN that the exception from zero rating only applied to drinks that were sports drinks in the first place, that is, the composition of the drinks was relevant, not just the advertising or marketing. The FTT found that sports drinks “contain a significant quantity of carbohydrate, together with salts (such as sodium and potassium), designed to replenish the body after exercise”. The Sunwarrior products contained low to negligible levels of carbohydrate, and accordingly the FTT held that they were not sports drinks. 

However, in case the FTT’s statutory interpretation of Item 4A was wrong, so that Item 4A applied to any drink advertised or marketed as being designed to enhance physical performance, accelerate recovery after exercise, or build bulk in a sporting context, then the FTT held that only one of the three Sunwarrior products was marketed and advertised as such, and would, under this alternative approach, be standard rated. Marketing and advertising for the other two products was focused on helping customers lead healthy active lives in general, and was not specifically sports related. The FTT upheld GBN’s appeal. 

Global By Nature Limited v HMRC [2025] UKFTT 24 (TC)

From the Weekly VAT News dated 20 January 2025, published by Deloitte

Fundraising events

The Yorkshire Agricultural Society (the Society) is a charity that organises and runs the annual Great Yorkshire Show. For the VAT exemption for charitable fundraising events to apply, the show’s primary purpose must be to raise money. In considering the VAT treatment of admissions to the 2016 show, the Upper Tribunal (UT) has upheld the First-tier Tribunal’s (FTT’s) decision that the VAT exemption applied. The UT disagreed with the FTT’s finding that the fundraising only had to be “a” primary (ie, important) purpose, rather than “the” primary purpose. However, the UT agreed with the FTT that the fundraising was not a discrete purpose, but was one of two equally important and interdependent purposes, the other being education, which formed a single, main purpose of the show, satisfying the requirement for the VAT exemption. 

The UT also agreed with the FTT that the other UK legislative condition (that the show should be “promoted as being primarily for the raising of money”) was not necessary to the requirement in the EU Principal VAT Directive that the fundraising exemption should not distort competition, and that the condition was accordingly ultra vires. Consequently, applying a conforming interpretation (the Marleasing principle) to that UK legislative condition, the UT concluded that the preferable interpretation was that the word “primarily” should be deleted (as opposed to the deletion of the whole sub-clause). HMRC’s appeal against the FTT’s decision was accordingly dismissed. (In light of the analysis around conforming construction, both parties agreed that the applicable law was the EU law in place at the end of the Brexit Implementation Period, 31 December 2020, as the supplies in question were made in 2016 and the Society’s claim for the repayment of overpaid VAT was made in 2020.) 

HMRC v Yorkshire Agricultural Society [2025] UKUT 4 (TCC)

From the Weekly VAT News dated 13 January 2025, published by Deloitte