VAT and the 2025 budget

VAT and the 2025 Budget

The Autumn 2025 Budget included relatively few VAT changes.  The announcements likely to have the widest impact are:

VAT registration threshold

The VAT registration threshold remains unchanged which is likely to mean, with inflation, more businesses are likely to 

Electronic invoices

This is a change that will not effect the tax payable but could have quite a wide ranging impact. The Budget Policy paper advises that VAT invoices relating to for business-to-business and business-to-government will have to be issued as e-invoices. The change is intended to apply from April 2026 and a roadmap on implementation to be published next year.

Charity Tax Relief 

A new VAT relief will be introduced from 1 April 2026 for business donations of goods to charity for distribution to those in need or use in the delivery of their charitable services.

Other announcements likely to have a more limited application are: 

Motability Scheme changes to VAT and IPT reliefs 

From July 2026, vehicles leased through the Motability Scheme, or through any equivalent qualifying schemes, will be subject to 20% VAT on top-up payments which are made in addition to the transfer of eligible welfare payments for more expensive vehicles on the scheme. Insurance Premium Tax will also be applied at the standard rate of 12% for insurance related to vehicles leased through the scheme. 

The Tax changes will not apply to vehicles designed for, or substantially and permanently adapted for, wheelchair or stretcher users. 

The VAT reliefs on weekly lease costs, paid using the customers eligible welfare benefits, and vehicle resale will remain in place. 

Tour Operators Margin Scheme and Taxis

Suppliers of private hire vehicle and taxi services will be excluded from the scope of the Tour Operators’ Margin Scheme from 2 January 2026, except where these are supplied in conjunction with certain other travel services.

This measure aims to prevent ride-sharing taxi apps from using the Tour Operators Margin Scheme and paying VAT on the profit element, rather than the full value, of charges for journeys.

Cross-border VAT Grouping

This announcement reflects a change in HMRC policy effective immediately. It will apply to UK VAT groups with establishments in the EU.

Since 1 January 2016 HMRC required UK businesses to account for VAT under the reverse charge mechanism on certain intra-group services. The services in question were those provided by an overseas establishment of a VAT group member to a UK establishment of a VAT group member. 

In some cases this could create a VAT liability for the UK VAT group. It may be possible to reclaim, what is now considered, overpaid VAT through the error correction procedure.

HMRC now considers that an overseas establishment of a business VAT grouped in the UK should be treated as part of that VAT group, even when located in an EU member state that does not operate whole entity VAT grouping. Supplies between group members are normally disregarded for VAT.