VAT and other indirect taxes changes in 2026

• The Government has legislated to exclude private hire vehicle operators from the UKs Tour Operators Margin scheme from 2 January 2026, except where they supply as part of wider travel services.

• Remote Gaming Duty increases to 40% from 1 April 2026.
• Bingo Duty will be abolished on 1 April 2026.
• VAT treatment of business donations of goods to charity: a new relief will exclude donated business goods from the deemed-supply VAT rules from 1 April 2026.

• VAT will be applied to advanced ‘top up’ payments for all new Motability car leases from July 2026.
• From 1 July 2026, the standard 12% Insurance Premium Tax rate will apply to most vehicle insurance policies under the Motability scheme.
• Low value imports into EU countries: from 1 July 2026, there will be a default duty charge of 3 Euros on each parcel where the value of the goods is below 150 Euros. The EU also plans to abolish the 150 Euro duty de-minimis in 2028. 

• A Vaping Products Duty will be introduced from 1 October 2026. The duty, an excise tax, will be at a flat rate of £2.20 per 10ml vaping liquid, accompanied by an equivalent further one-off increase in Tobacco Duty to maintain the financial incentive to switch from tobacco to vaping.
• The one-off tobacco duty increase (£2.20 per 100 cigarettes or 50g of other tobacco) will take effect on 1 October 2026, in addition to the annual RPI plus 2% increase, to maintain the price gap between vapes and cigarettes.

• In the 2026 Budget, the Government has committed to publish an implementation timetable for mandatory electronic invoicing for all VAT invoices by 2029 – see below.

• The government is consulting on the design of a new Mayoral power to create these levies.

• Find out more

• A consultation on reform of the relevant VAT rules ‘to incentivise development’ is expected

• The government plans a call for evidence on embedding compliance standards in electronic and mobile point-of-sale software.

• The government plans to consult on the idea of requiring certification to claim PPT exemptions for mechanically recycled plastics.

• The government is to consider mechanisms such as mandatory direct debit to ensure prompt payments.

• The government will consult on strengthening the notification regime (ie penalties).

• The government will consult on draft legislation.

From 1 January 2027, businesses that import over £50,000 of aluminium, cement, fertiliser, hydrogen and iron or steel over a 12-month period will be subject to a new UK CBAM charge. This is a 'green tax' to ensure that carbon intensive goods that are imported into the UK face a comparable carbon price to that paid by UK manufacturers producing the same goods. Importers will have the option to pay a default rate by imported goods type or a rate based on their actual emissions. A charge on indirect emissions will be deferred until at least 2029. Read more about EU CBAM legislation. 

Remote betting duty will rise to 25% from 1 April 2027 although duty on remote horserace betting will remain at 15%.

The Government carried out a consultation in 2025 on its proposed move towards mandatory e-invoicing in the UK (you can view BDO’s response here). At the 2025 Budget, it announced the plan would go ahead to mirror a worldwide trend towards e-invoicing, and it is expected that the UK rules will be aligned to the commonly adopted rules within the EU and other major trading jurisdictions. More detail is expected from the UK government on the UK’s roadmap in 2026 to plan to move to full adoption in 2029.  

In the 2025 Budget, the Government announced proposed changes to the SDIL to be implemented from 1 January 2028, including:

• The current lower threshold at which SDIL applies will reduce from 5g of total sugars per 100ml to 4.5g of total sugars per 100ml.
• The current exemption for milk-based drinks with added sugar will be removed - this will impact prepackaged milkshakes and lattes. However, ‘open cup’ milkshakes prepared on-site will remain out of scope of SDIL, as will plain cow’s milk and other milk drinks without added sugar. A ‘lactose allowance’ will be introduced to account for naturally occurring sugars in milk when calculating the SDIL liability in this area.
• Milk substitute drinks without added sugar will remain outside the scope of SDIL – including plant-based drinks that only contain sugars derived from their ‘core’ ingredient.

In late 2022, the European Commission launched its long-awaited proposals to modernise VAT rules within the EU, collectively known as the 'VAT in the Digital Age' package. The final arrangements, now agreed between all member states, will have a significant impact on UK businesses and businesses trading across the EU.

The VIDA proposals consist of three key Pillars; Digital reporting and E-invoicing, the Platform economy and the Single VAT Registration. Under the final agreement, ViDA will be introduced in stages between 2028 to 2030, with a final convergence to the EU e-invoicing standard by 2035. Please see our article on digital VAT in the EU.

Currently, UK buyers making Low Value Imports (LVIs) - goods with a value of £135 or less being imported into the UK - can claim a customs duty relief, although VAT is due on these goods.

The rapid rise in cross-border e-commerce means some online retailers are being placed at an unfair advantage due to the UK’s customs duty relief for low-value imports of, largely, Chinese goods. The Government has decided to reform existing customs arrangements for LVIs (as the USA has done and the EU is planning). The aim is to remove relief for LVIs by March 2029, and the Government is consulting on various options.

Colchester Institute Corporation has a long running dispute with HMRC relating to the provision of education by a further education college will be heard in the Court of Appeal. The FTT and Upper Tribunal concluded that where supplies of education and/or vocational training were for consideration, they were a business activity for VAT purposes and therefore exempt from VAT. HMRC disputes this and is seeking a conclusive ruling that state-funded FE education is not a business activity.

The case has wide ranging implications in the education sector, including for building projects and energy certification. At present, taxpayers, based on HMRC’s previous Brief, are allowed to continue treating such supplies as non-business, which in most cases will be preferable and avoids considerable VAT issues on building projects and energy VAT relief. However, the risk is that the courts will ultimately agree with the Colchester case, which may remove the option for taxpayers to choose non-business treatment. This would cause considerable problems.

Bolt Services UK Limited - VAT treatment of private hire vehicles

This case concerns whether VAT is able to be declared using the Tour Operators Margin Scheme (TOMS) for ‘on demand’ private hire journeys booked through an online app.

The Upper Tribunal decided the matter of whether the services are ‘of a type’ commonly provided in the travel sector should be considered on a high level, and that Bolt have met this test. Both the FTT and UTT agreed that the services bought in by Bolt are for the ‘direct use’ of the passenger and are not ‘materially altered’. This included consideration of another recent Upper Tribunal decision in Sonder Europe (below), where the court set out some relevant matters to be considered in this area.

There are considerable sums at stake in this case and related disputes so the Court of Appeal ruling on this case is likely to be an important one – and the case may yet go to the Supreme Court. While the eventual outcome may be highly significant for the company and similar providers such as Uber, HMRC has already changed the TOMS legislation to exclude private hire vehicles from 1 January 2026, so the ruling’s impact will only be retrospective.

The Court of Appeal is due to hear this case on holiday accommodation provided in the UK to corporate and leisure travellers. Sonder leased self-contained apartments from third-party landlords and sublet the apartments to travellers for different periods from a single night to a month or more. Sonder provided internal fixtures and some furniture and utensils where needed, undertook internal repairs, and furnished 60% of the properties. The accommodation was booked online and Sonder had no staff on site; there was no check out procedure as would be the case for a hotel.

Sonder accounted for VAT on the basis that its supplies fell within the scope of the TOMS, and so they accounted for VAT on the margin. When the case reached the FTT, it agreed that TOMS applied. However, UTT agreed with HMRC that the supply by the landlord was not ‘on-supplied’ by Sonder without being 'materially altered or processed' – so a key requirement of TOMS was not met.

Chelsea Cloisters Management Limited

This case relates to service charges levied by a residential property management company under tripartite lease arrangements. The company had not registered for VAT on the basis that it was supplying services to leaseholders, which were exempt under ESC 3.18.

HMRC considered that the concession did not apply as the company had no interest in the land, it therefore made taxable supplies of property management under arrangements with the freeholder. HMRC retrospectively registered the company and directed it to submit a VAT return, where almost £1m VAT was declared, pending an appeal.

While the FTT has no jurisdiction to consider matters regarding extra statutory concessions, the FTT set out it that would have found all of the conditions of the concession were met if it did had jurisdiction. The case will go to judicial review, to decide whether HMRC was wrong to deny the concession because, as the FTT judge set out, supplies were made directly to leaseholders under obligations in the tripartite lease which were mandatory.

A dispute over whether ‘mega marshmallow’ products are standard rated confectionery or zero-rated food reached the Court of Appeal (COA) last year judgement regarding and whether they are standard rated confectionary or zero-rated food. After victories for the taxpayer in the FTT and Upper Tribunal, the COA considered that both lower courts had not considered the relevant issues and ordered a fresh FTT hearing.

The COA considered that, recognising the clear words in the law, plus the intention of Parliament, a new FTT decision is required to address whether or not the products are 'sweetened' and are 'normally' to be 'eaten with the fingers'. This ‘catch all’ test was introduced into UK law in 1988 to catch cereal bars and other confectionery meeting the ‘fingers’ test.

The case may be decided on whether the FTT agrees that “mega marshmallows” are predominantly consumed following roasting on a stick or just ‘eaten with the fingers’. It emphasises just how important it is for food retailers and manufacturers to be aware of the differing tests applied based on the law or caselaw to different types of foods, and with other caselaw pending on similar issues.

In this case on plant-based protein powders, the FTT concluded that the products are zero rated food and not standard rated ‘sports drinks’ as argued by HMRC. In the absence of a statutory definition of a ‘sports drink’ the FTT’s preferred approach was a two part test: the first asks if a drink is a ‘sports drink’ and then, if it is, one should look at marketing aspects and whether it is a similar product to others. Given the low carbohydrate content, the FTT was persuaded that the products were not sports drinks and therefore zero rated.

HMRC has appealed to the UTT and is expected to argue that there is evidence from Hansard etc at the time the sports drinks legislation was introduced that suggests that the intention was to tax drinks marketed in a particular way that were not already taxed, for example as ‘beverages’.