Indirect tax updates

This month's theme is certainty on some fronts, uncertainty on others.

Summary 

This update highlights how VAT law is developing on three very different fronts. 

The promised cut to 0% on domestic electricity remains a "watch this space" for now — the Prime Minister announced the headline rate change, but no draft legislation has been laid, leaving scope, transitional tax points and the Northern Ireland position all open questions we are tracking closely. 

By contrast, the courts have delivered welcome clarity elsewhere: the Northern Ireland High Court's decision in McKinstry Skip Hire corrects a common assumption about VAT and motor damage claims, confirming insurers cannot simply net off reclaimable VAT from a settlement. 

The First-tier Tribunal's decision in Tapi Carpets reinforces, for the second time in as many years, that a well-structured agency model can keep VAT off independent contractors' fees, provided the paperwork and the practice genuinely match. 

Together, these developments are a reminder that while some VAT questions are settling into clearer patterns, others, particularly where policy outpaces legislation, still need careful, real-time monitoring.

Watch this space: VAT zero-rating of domestic electricity – legislation still awaited

The Prime Minister announced on 21 July 2026 that VAT on qualifying domestic electricity supplies will be cut from 5% to 0% from 1 October 2026 to 31 March 2027, funded through cancellation of the Digital ID programme. At the time of writing this update, no draft order to change the law has been laid before Parliament. The expected mechanism is a statutory instrument (utilising the same powers used for the energy-saving materials zero-rating relief), rather than a Finance Bill measure.

Points still open pending the draft:

• Scope: whether "qualifying use" follows the existing domestic/charity non-business/care home definition unchanged, or is drawn differently (we anticipate a carve out for electric vehicle charging points as we know HMRC would like these supplies to be taxed at the standard rate)
• Gas and other fuel and power: no indication the 0% rate extends beyond electricity; gas expected to remain at 5%
• Transitional rules: tax point treatment for supplies spanning 1 October, advance payments and credit notes
• Northern Ireland: expected to remain at 5% under Windsor Framework constraints, with compensating funding to the NI Executive rather than a legislative fix.

Given the implementation date being less than a month away the order should surface for scrutiny within the coming weeks. We will flag as soon as it is published, and we will want to get ahead of the transitional tax point questions once we see the drafting, that is likely to be where the real technical queries come from.

We have no case reports from the Supreme Court, Court of Appeal, nor Upper Tribunal, and the Court of Justice of the European Union is on its summer recess, however we have a case from the Northern Ireland High Court and one from the First Tier Tribunal

VAT and motor damage claims: Northern Ireland ruling challenges common assumption

A Northern Ireland High Court decision has overturned a long-standing assumption about how VAT should be treated in motor damage claims — one worth noting by any business handling third-party vehicle claims, particularly motor insurers.

The facts

In McKinstry Skip Hire Ltd v Highway Insurance Company Ltd, a VAT-registered plaintiff's skip lorry was damaged by a third party. The insurer argued it should only pay the net repair cost, since McKinstry could reclaim the VAT from HMRC. The court disagreed, ruling the full VAT-inclusive cost was recoverable.

Why: the loss crystallises immediately

The reasoning turns on a subtle but important distinction. Repair costs are often assumed to be “special damages” a precise, receipted figure subject to a duty to mitigate. The Court confirmed that is the wrong approach.

It explained the claimant's real loss is the drop in the vehicle's value at the moment of damage, not the repair bill itself; the invoice is simply evidence of that value drop. Because the loss is immediate, later events (whether repairs happen, happen cheaply, or don't happen at all) don't change it, and there's no duty to mitigate. Whether the claimant can later reclaim VAT is a separate, subsequent question that does not reduce the damages award.

Limited but relevant precedent

As an NI decision, this does not bind courts in England and Wales. However, it relies almost entirely on binding English Court of Appeal authority (Coles v Hetherton), so it's best seen as a persuasive application of established E&W law to a VAT scenario, not new authority in its own right, but a strong signal of how the same argument would likely apply in England and Wales.

Why this matters

Many insurers work on the basis that claims should be settled net of any VAT the claimant can reclaim. This decision says that assumption doesn't hold: full cost, VAT included, is recoverable regardless of the claimant's own VAT position. Businesses and insurers involved in commercial vehicle claims should review their claims-handling approach in light of this.

Upper Tribunal

First-tier Tribunal

Tapi Carpets: FTT confirms agency model keeps VAT off carpet fitting fees

The First-tier Tribunal has again backed a retailer's agency structure for carpet fitting, this time in Tapi Carpets Ltd (TC09975). The decision follows last year's United Carpets case and gives retailers using similar models continued comfort that VAT doesn't need to be charged on independent fitters' work.

What happened

Tapi sells carpets through around 220 stores. Customers can fit the carpet themselves or use a self-employed fitter from Tapi's vetted pool. Customers pay Tapi an "arrangement fee" (VAT charged) and pay the fitter separately for the fitting itself. Most fitters traded below the VAT threshold, so no VAT applied to their fee.

HMRC argued the fitters were really subcontractors to Tapi, making Tapi liable for VAT on the full fitting charge — an assessment worth £13 million over four years. HMRC tried to distinguish Tapi from United Carpets by pointing to Tapi's agency wording, its fitting-confirmation messages, and its fitting guarantee.

Why the tribunal disagreed

The FTT found the substance of the arrangement matched Tapi's paperwork: it introduced customers to fitters and arranged appointments, but didn't take on the fitting obligation itself. Key factors:

• Fitters could accept or decline jobs, and could negotiate price directly with customers — Tapi's quoted fee was only an estimate.
• There was no contract obliging Tapi to provide work, or fitters to accept it, and no obligation on Tapi to pay fitters if a customer didn't pay or complained.
• Tapi monitored fitter performance to protect its brand, not because it was liable for the work — its only real sanction was removing a fitter from the pool.
• Standard "reasonable care and skill" requirements didn't turn fitters into subcontractors; that's normal industry practice.
• Customer-facing wording using "we"/"us" was read in context as Tapi and its "fitting partners" together, not Tapi alone.

Why this matters

Retailers using an introducer/agency model for associated services — not just carpets — now have two FTT decisions supporting VAT-free treatment of independent contractors' fees, provided the contractual and operational reality genuinely reflects an agency relationship. The tribunal's emphasis on well-drafted terms and conditions, real commercial risk-sharing, and consistency between paperwork and practice is a useful checklist for any business reviewing its own arrangements. HMRC hasn't signalled whether it will appeal, so this remains an evolving area — we'll keep you posted on developments.