Tax Digest February 2026

The latest tax update and VAT round up for the month

Tax Update provides you with a round-up of the latest tax developments. Covering matters relevant to individuals and businesses, it keeps you up-to-date with tax issues that may impact you or your business. If you would like to discuss any aspect in more detail, please speak to your usual Cleverrbook contact.

FTT finds for HMRC in case on mass-marketed tax avoidance scheme on contractor loans.

Over 700 taxpayers participated in a scheme known as Rathowen. The basis was that companies for which individuals based in the UK were working as contractors did not pay them directly, but put money into a network of companies. The individuals received a small payment from an Isle of Man (IoM) company, and a larger interest free loan, from another IoM company. The individuals declared that they were self-employed, and included a note on their returns about the loan explaining their view that the loan was not subject to UK tax.

HMRC issued closure notices, and contended before the FTT that the loans formed part of income arising from self-employment. Ten of the individuals were the lead appeals for the group at this hearing.

The FTT found for HMRC. This was a tax avoidance scheme designed to avoid some consequences of the IR35 rules. All participants had joined a scheme related to the UK-IoM double tax treaty through partnerships, then been migrated to the Rathowen arrangements. The end clients for whom the individuals were working were not informed of the scheme. The individuals’ arguments that the amounts received by way of loan were not taxable as trading income, or should be reduced for expenses (the scheme fees), were not upheld.

The FTT, as in other similar cases involving disguised remuneration, gave the taxpayers’ arguments relatively short shrift. Assuming there is no further appeal, it does not seem as though the appellants can avail themselves of the new loan charge settlement opportunity announced in the November Budget, as that explicitly excludes cases which are in the Tax Tribunal process.

The Cryptoasset Reporting Framework (CARF) came into force in the UK on 1 January.

This new set of rules require UK reporting cryptoasset service providers to collect and report details of their users, including their activities and tax residency, to HMRC annually. Data will be exchanged with other jurisdictions who have also implemented the CARF. HMRC will use this data to tackle tax evasion and avoidance and to help individuals meet their tax obligations. Separately, there is also a new section in the capital gains pages of the 2024/25 self-assessment tax return specifically for cryptoasset disposals.

The taxpayer’s employment was terminated due to his long term sick leave. His employer offered two options: he could take a settlement agreement or follow the company absence process. He chose the settlement, which offered a PILON, a termination payment and other benefits.

PAYE was deducted from the PILON, which the taxpayer disputed, but this point was overtaken by procedural issues. HMRC succeeded in its application to strike out the appeal, as the FTT had no jurisdiction. HMRC had not opened an enquiry into a return or standalone claim. The taxpayer had just written seeking a refund, and HMRC’s refusal was not an appealable decision.

The PILON issue was also considered by the FTT to accelerate a final resolution of the matter. The taxpayer argued that it fell within the exemption from tax for payments made due to employee disability. HMRC argued that it was taxable as earnings, as it was not made due to the disability, as this was not specifically stated in the settlement agreement. The FTT considered that it was not earnings, but a termination payment. However, the payment was made in lieu of notice rather than due to disability, so the exemption did not apply in the FTT’s view, although this was not a formal decision.

The taxpayer’s error correction notification (ECN) was rejected by the FTT on the basis that it was submitted outside the statutory four-year time limit for claims.

The taxpayer had been registered for VAT since 2009 but was only advised in 2019 that they were required to register for VAT in Germany to account for sales made there. In 2023, the taxpayer notified HMRC of error corrections for the relevant periods arising in 2014, 2015, 2016 and 2019 respectively.

The taxpayer sought repayment of VAT from HMRC for the UK VAT paid in error on German sales as the taxpayer had effectively paid VAT twice on these sales.

HMRC confirmed that it would not pay claims made more than four years after the ‘relevant date’ being the end of each individual prescribed accounting period. In this case, all claims were out of time. HMRC also raised the point that the taxpayer was aware of the time limit prior to submitting their claims.

The taxpayer argued that the relevant legislation was restrictive for any legitimate errors and that HMRC had discretion which it could use to extend the limitation period accordingly.

The FTT rejected the taxpayer’s appeal on the basis that the Tribunal had no jurisdiction or power to circumvent the limitation period set out in the primary legislation and as a result the taxpayer was required to pay VAT in both the UK and Germany on the same sales.

HMRC yearly interest rates on overdue tax will decrease by 0.25%, following the Bank of England base rate cut from 4% to 3.75%.

The rate applied to the main taxes will become 7.75%. The rate of interest on repayments from HMRC will become 2.75%.

This change generally applies from 9 January, but for quarterly interest payments it applies from 29 December 2025 and the rates also differ.

The FTT dismissed the taxpayer’s appeal that property maintenance services were exempt from VAT on the basis they were made to the lessor, not the lessee, and did not form part of exempt supplies of land.

The taxpayer had various subsidiaries consisting of management trust companies (MTCs) and a management company (MC). The taxpayer, the MTCs and MC all form part of the same VAT group. The lessors of the flats are various entities, none of which are members of the VAT group.

The taxpayer argued that the services MTCs supplied were to the residential lessees and therefore the maintenance services provided could be treated as part of a single exempt supply of land with the lease. It was argued that supplies made by the MTCs were ancillary to the principal supply of land made by the lessor under the lease and therefore took the VAT status of the principal supply, being the exempt supply of land. Additionally, the taxpayer argued that the cost for the MTCs employing their own staff constituted ‘disbursements’ and was therefore outside the scope of VAT.

HMRC maintained that the supplies could not be fused with the exempt supply of land made by the lessors. Supplies from different suppliers could not be treated as a single composite supply for VAT purposes. HMRC further stated that the services supplied were made to the lessors on the basis the contractual relationship was between the MTCs and lessors. The MTCs were making taxable supplies being the maintenance services. The fact that the lessees benefited from the services supplied by the MTCs did not mean those services were supplied to them by MTCs for VAT purposes.

The FTT found against the taxpayer on both issues and concluded that MTCs providing maintenance services could not benefit from exemption and so were subject to VAT. Also the costs incurred by MTCs in employing their own staff were not disbursements for VAT purposes.

This case serves as a reminder of the care needed to ensure that the correct VAT position is applied in respect of property management services.

The SC upheld the CA decision that input tax on professional fees incurred as part of the sale of shares in a subsidiary were not deductible for VAT.

The taxpayer was a holding company providing management services to its subsidiary, which was the lessee of a luxury hotel in Birmingham. The taxpayer sold its shareholding in its subsidiary to fund the development of a new hotel in Milton Keynes, incurring VAT on legal fees in the region of £76,000.

The taxpayer argued that professional fees associated with the share disposal were linked to the overall business making taxable supplies, rather than to the exempt share sale, on the basis the disposal took place to fund the development of the new hotel.

HMRC disputed this and argued that the fees were incurred as part of a supply that was exempt from VAT, being the sale of the shares.

Despite the FTT and UT allowing the taxpayer’s appeal on the basis the share sale was a fundraising exercise linked to the overall hotel business, this decision was overturned by the CA. It found that the supplies were directly linked to an exempt share sale, not the taxable hotel business. The SC upheld this decision and confirmed the input tax was irrecoverable.

The FTT has found on the facts that a house with an annex qualified as two separate dwellings. Multiple dwellings relief (MDR) therefore applied.

The taxpayers purchased a house with an annex. He sought to class this as two separate dwellings, so that the SDLT on purchase would be reduced by MDR. Both house and annex had their own doors to the outside, water supplied, heating and fuse boards. There were two internal connecting doors. The annex had both cooking and washing facilities.

HMRC argued that the annex was not a separate dwelling, as although it had been used as such previously when let by the previous owner to students, it was not in a condition to be a separate dwelling. The only washing facilities (shower) were in the kitchen, with a separate room for the lavatory. The house and annex had one title and one council tax registration.

The FTT found for the taxpayer. It could consider the past history of the dwelling. The position of the shower would be suitable if there was one occupier, and a dwelling was not just a dwelling if suitable for multiple occupiers to have privacy from one another. Considering all the factors, the annex had a sufficient degree of privacy, self-sufficiency, and security to be a dwelling on its own, so with the history this was enough to allow the taxpayer’s appeal.

The taxpayer’s error correction notification (ECN) was rejected by the FTT on the basis that it was submitted outside the statutory four-year time limit for claims.

The taxpayer sought repayment of VAT from HMRC for the UK VAT paid in error on German sales as the taxpayer had effectively paid VAT twice on these sales.

The taxpayer argued that the relevant legislation was restrictive for any legitimate errors and that HMRC had discretion which it could use to extend the limitation period accordingly.

In association with silverthrone.co.uk / Chartered Accountants