Tax Update July 2025

HMRC is writing to taxpayers to remind them of their tax obligations where they have received a director’s loan that has been written off or released. 

HMRC is writing to taxpayers who have received a director’s loan that was either written off or released between April 2019 and April 2023, reminding them that these amounts are taxable and should be declared. 

Individuals and their agents are able to make a disclosure to HMRC using their digital disclosure service.  For loans since 6 April 2023, tax returns are still within the amendment window and so HMRC should be notified of any undeclared amounts by way of amendment to the relevant tax return. 

Issue 132 of Agent Update - GOV.UK

The UT has found that HMRC was correct to deny business investment relief to a taxpayer who had drawn on his director’s loan account to pay personal expenses.

A UK resident non domiciled individual incorporated a UK company and became the sole shareholder and director. He invested £1.5m in it, which was overseas income he brought into the UK a week before incorporation. Having taken advice in advance, he claimed business investment relief (BIR), but this was denied by HMRC, as the taxpayer had drawn on his director’s loan account with the company to pay personal expenses. The total loan was just over £70,000, drawn in the tax year after the investment.

The taxpayer argued that he should be eligible for BIR, because although he had extracted value from the company he had not extracted net value, as the interest free loan was subject to tax. In addition, the director’s loan was provided in the ordinary course of business on arm’s-length terms. HMRC argued that extraction of value meant simply that. It did not mean adding a word to become net extraction of value. Despite the difference between the £1.5m investment and £71,000 loan, even a single payment from the company to the taxpayer for personal expenses was a receipt of value. Alternatively, the taxpayer was better off financially due to the loan so had received net value. 

HMRC won at the FTT, which found that extraction of value did not mean net value on the natural reading of the legislation. Acknowledging that this could lead to strange outcomes with trivial extractions of value, it considered whether or not this accorded with the purpose of the legislation, and concluded that it did. There was no minimum set in the legislation, and the language was too strong to justify departing from it because of a strange outcome. In this case, the loan was not on arm’s-length terms, as an interest-free unsecured loan on an informal basis.

The UT agreed with the FTT and HMRC and dismissed the taxpayer’s appeal, finding that the provision of the director’s loan account had breached the extraction of value rule. This results in denial of relief of the full £1.5 million investment.

D'Angelin v HMRC [2025] UKUT 212 (TCC)

www.bailii.org/uk/cases/UKUT/TCC/2025/212.html 

The CA has agreed with the UT and FTT that an avoidance scheme that sought to exploit a provision in the UK-Mauritius double tax treaty was ineffective. The place of effective management of the trusts was the UK, not Mauritius, so the gains were subject to UK CGT.

Two taxpayers established a trust each, and the trustees made substantial capital gains in August 2000. The trusts were at first Jersey resident, but for a four month period, including August 2000, Mauritian resident trustees were appointed instead, before UK trustees were appointed. The aim of this arrangement was to give Mauritius taxing rights over the gains, as it did not charge CGT.

The FTT considered a previous CA decision in a similar case, and decided that, as in Smallwood, this scheme failed because the trusts were not truly Mauritian tax resident. Under the treaty, a tie breaker provision allows for residence in the place of effective management of a trust, as the body of trustees were a person within the meaning of the treaty, and during the period when Mauritian trustees were in position this place was the UK.

The UT upheld that decision. The taxpayers argued at appeal that the FTT had used the wrong test to determine the place of effective management of the trusts. A previous CA decision on the location of central management and control of a company had mentioned that the company and trust tests are the same in substance, so they contended that this case should be followed. The UT found that the FTT was entitled to follow the test in Smallwood, a CA trust case, instead. Therefore there was no error of law made in using that test.

The CA dismissed the taxpayer’s latest appeal. The taxpayers continued their argument that the FTT had used the wrong test to determine the place of effective management of the trusts, but the CA disagreed.

Haworth & Ors v HMRC [2025] EWCA Civ 822

www.bailii.org/ew/cases/EWCA/Civ/2025/822.html 

The UT has overturned an FTT decision on a share buyback transaction, finding for the taxpayers that the purpose of the arrangements was not to obtain an income tax advantage.

The taxpayers invested in a company, and believed that they would obtain EIS (enterprise investment scheme) relief on their investments. The company eventually bought back their shares, primarily to preserve the EIS relief as the taxpayers were concerned about a potential change of government. HMRC argued that the main purpose was to obtain an income tax advantage, and the FTT agreed.

The UT has overturned that decision. The transactions did result in an income tax advantage, but this was not the main purpose of the transactions.

Osmond & Anor v HMRC [2025] UKUT 183 (TCC)

www.bailii.org/uk/cases/UKUT/TCC/2025/183.html 

The FTT found that HMRC’s discovery assessments were valid as a result of the deliberate behaviour of an acting company.

The taxpayer appealed discovery assessments made by HMRC outside the normal four year limit in relation to excessive expense claims made.  

The taxpayer’s colleagues were approached by a company who told them they were entitled to claim ‘tax rebates’ in relation to job related expenses.  Upon hearing this the taxpayer contacted the company directly and provided them with some information but no details of any expenses incurred.  The company sent the taxpayer what they called calculations for his approval however there was no breakdown. He approved the calculation and the company submitted tax returns on his behalf. He was not aware that self-assessment returns were being submitted and did not approve any tax returns. When the assessment was made by HMRC, the taxpayer explained what had happened and eventually confirmed that these expenses shouldn’t have been claimed.  

Although the FTT had great sympathy for the taxpayer, it found that the company was acting on his behalf and as a result, their deliberate actions meant the extended time limits for the assessments applied and therefore the appeal was dismissed.

Lucas v HMRC [2025] UKFTT 702 (TC) 

www.bailii.org/uk/cases/UKFTT/TC/2025/TC09550.html 

The FTT has found that a taxpayer was not subject to IHT on a transaction where IT had already been charged.

The taxpayer entered into an employee benefit trust (EBT) scheme, which she accepted did not work. The intention had been to allow her to receive sums free of tax. At the FTT she challenged HMRC’s further argument that the scheme had created an IHT charge.

Under the scheme, funds moved through a series of transactions, though never into the trust itself, unlike in most EBT scheme cases. HMRC argued that here a close company had made a transfer of value to a participator, resulting in an IHT charge.

The FTT found that this fell within the IHT exemption for transfers of value on which IT or CT is due. HMRC’s argument that the transaction on which IHT had been charged, and the transaction on which it sought to charge IT, were separate was not valid. This was quite a niche fact pattern compared to the usual EBT scheme structure. 

Tonkin v HMRC [2025] UKFTT 750 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2025/TC09557.html 

The UT has ruled on the correct valuation and allocation of acquisition costs for care homes purchased by the taxpayer, affirming the decision of the FTT to apply market value, adjusted by special assumptions, as the proper method for valuation under GAAP.

The taxpayer acquired five care homes between April 2004 and May 2007 and allocated purchase prices among freehold property, goodwill and fixtures/fittings. The issue affected deductions for corporation tax purposes, as goodwill amortisation depends on the purchase price allocated as per GAAP. The taxpayer argued a depreciated replacement cost should be used as there is no active market for non-operational care homes.

The UT agreed that the FTT had sufficient evidence that operational care homes were ‘similar in type and condition’ to the assets being valued, and it was therefore entitled to suggest the use of a market value, adjusted by special assumptions, as per GAAP and RICS guidance.  The tax amortisation calculations and allowances needed to be recalculated accordingly. 

Nellsar Ltd v HM Revenue & Customs [2025] UKUT 164 (TCC) 

www.bailii.org/uk/cases/UKUT/TCC/2025/164.html 

In the Autumn, HMRC asked for views on how the capital allowances guidance could be improved.  It has now issued an update on what guidance has now been updated, as well as the areas it is still working on. 

To date guidance on the following areas has been updated:

• Interaction between different types of allowances
• Software
• Second-hand assets
• Long-life assets
• REITS
• Furnished holiday lets
• Fixtures

Some areas were more complex and HMRC is continuing to consider how guidance can be improved in these areas, including:

• Leasing
• Employees and office holders claiming allowances
• The meaning of plant
• The meaning of the term ‘on the provision of’.  Given the court decision in the Gunfleet Sands case and the ongoing litigation it is unlikely that there will be any changes to the guidance on this area in the short term 

Capital allowances: areas of uncertainty – update for stakeholders | Chartered Institute of Taxation

The FTT agreed with HMRC on the correct method for calculating the level of consortium relief available where the group structure involved link companies. It also restricted the relief, as the corporate structure had a main purpose of achieving a tax advantage.

The taxpayer sought to claim consortium relief to offset losses of other companies in a different corporate group. The taxpayer’s eligibility for consortium relief depended on ‘link companies’ that held voting power, share capital and distribution rights.  The taxpayer argued that the ownership proportion under CTA 2010 s144 should be calculated by aggregating the entitlements of the three link companies, resulting in an ownership proportion of 74%.  HMRC argued that the link companies’ proportions should be taken collectively, and the legislation did not permit multiple counting of the same interests.  HMRC also submitted that the corporate structure was designed primarily to achieve an enhanced level of relief, and so available relief should be restricted under CTA 2010 s146B.

The FTT adopted a purposive approach, stating that the legislation’s aim was to calculate genuine proportional entitlements without double counting interests which could lead to absurd outcomes of more than 100%.  The FTT also concluded that achieving enhanced consortium relief was a main purpose of the structure, as it could find no commercial rationale for the unique shareholding, voting thresholds and governance arrangement.  

The FTT agreed with HMRC that the correct ownership percentage under the legislation was 40%, but as achieving a tax advantage was a main purpose of the corporate structure, relief should be restricted to 20% under. 

Eastern Power Networks Plc v HM Revenue & Customs [2025] UKFTT 703 (TC) 

www.bailii.org/uk/cases/UKFTT/TC/2025/TC09551.html 

The UK SC has upheld the CA decision that the hire cap applied to a vessel used as accommodation for offshore oil workers. The case revolved around whether or not the use of a vessel for accommodation was incidental to its primary use for drilling support services.

Dolphin Drilling Ltd leased the Borgsten Dolphin, a multi-purpose vessel, from an associated company. The vessel provided Tender Assisted Drilling (TAD) services and accommodation for offshore workers. Under CTA 2010 s356LA(3) there is a hire cap on contractors operating within the UK territorial sea or Continental Shelf, limiting the deduction of payments under leases between connected parties for any ‘relevant asset’. An exception exists if it is reasonable to suppose that the asset's use to provide accommodation for offshore workers is unlikely to be more than incidental to another use. 

The SC dismissed the taxpayer’s appeal, affirming the CA interpretation. The Court stated it was not appropriate for it to make rulings on the meaning of the phrase ‘incidental to’ in any context other than the context of this appeal. The legislative intent was to apply the hire cap broadly, including to multi-purpose vessels like the Borgsten Dolphin, where accommodation use is substantial and not merely ancillary to other functions. On that basis the hire cap applied.

Dolphin Drilling Ltd v HM Revenue & Customs [2025] UKSC 24

www.bailii.org/uk/cases/UKSC/2025/24.html  

The FTT has upheld the taxpayers appeal that drugs prescribed for cancer outpatients to use at home, but administered by a healthcare professional, should be considered as prescribed for ‘personal use’ and so qualify for zero-rating for VAT purposes. 

The taxpayer, a specialist pharmacy, dispenses medication to outpatients, including intravenous and injectable cancer medications. These medications are administered by healthcare professionals from the local hospital trust in patients' homes. To be zero-rated for VAT purposes drugs must be for personal use.  HMRC argued that the supplies should be standard rated, as they were not for the patients' ‘personal use’ due to the involvement of healthcare professionals in administering the drugs.

The FTT ruled in favour of the taxpayer, determining that the supplies of drugs to outpatients qualify for zero-rating. The Tribunal found that the legislative context and the ordinary meaning of ‘personal use’ support the zero-rating of these supplies, as they are dispensed for the use of specific patients and not for general or institutional use.

Clatterbridge Pharmacy Ltd v HMRC [2025] UKFTT 661 (TC) 

www.bailii.org/uk/cases/UKFTT/TC/2025/TC09544.html 

HMRC announces major change in how VAT is treated on pension fund management services. 

Historically, employers could only recover VAT on administration services, while VAT on investment management services required complex arrangements and apportionment between employers and trustees. The new policy simplifies this by allowing employers to recover all VAT on pension investment services, provided they meet standard VAT deduction rules. The requirement to apportion VAT between employer and trustee has been removed. Trustees who are VAT-registered and supply pension services to employers may also be able recover VAT on their costs.

The new policy took effect on 18 June 2025, and further guidance is expected by autumn 2025. Businesses should assess their current arrangement now to ensure compliance and maximise their VAT recovery position.  The historical position should also be considered as retrospective claims for relief may be possible. 

VAT deduction on the management of pension funds - GOV.UK

The following Tax publications have been published.

• New residency-based tax rules
• The future of accounting: Technology, automation and AI
• VAT recovery on pension management costs
• Five tax changes from April 2025 you need to be aware of Woodland and inheritance tax rules
• Charitable giving goes up the agenda and under the radar
• Employee ownership demystified: Direct, indirect and everything in between

As so often in And finally, the story this month is all about VAT. Yes, we’ve all read those classic debates – cake or biscuit, health bar or confectionery – but this month M&S has made it Wimbledon themed.

You may have thought that the difference between confectionery and a sandwich was clear, but the case of the strawberry and creme sandwich is headed straight for the tax tribunals. We hope the judge enjoys the essential taste testing, but it seems  that if you can have a brie and grape sandwich, surely a strawberry and cream cheese sandwich is allowable?

We await the judgement.

www.marksandspencer.com/food/content/strawberries-and-cream-recipe-ideas