Autumn Budget 2025: VAT and Indirect tax

There was significant relief that the autumn budget did not tinker with the VAT registration threshold as some expected would be the case. The following outlined below, are the various changes announced, some of which are to apply with immediate effect, and some others to be phased in gradually because they are expected to have a greater impact on businesses and taxpayers.

Clarifying cross-border VAT groups

In a change to guidance published in 2015, HMRC have withdrawn the Skandia-based guidance restricting EU Overseas Establishment inclusion. The restriction was that, where a member of a UK VAT group has an overseas establishment, that establishment could not be part of the VAT group. That restriction has now been withdrawn, with this change being effective immediately. Any businesses that overpaid reverse charge VAT under this policy can now reclaim overpayments via standard HMRC’s reclaim procedure within the 4-year time limits.

Low Value Consignment Relief (LVCR) Changes

The Low Value Consignment Relief (also known as Low Value Import relief) currently exempts goods imported into the UK valued at £135 or less from both import VAT (charged at 20%) and customs duties. The relief was introduced post-Brexit, and its aim was to simplify low-value imports.  However, following various criticisms including that it disadvantaged UK retailers against overseas online sellers that ship directly to consumers, and the fact it has contributed to an estimated £1-2 billion annual revenue shortfall and distorted competition, the government announced a phased abolition of the LVCR with effect from March 2029, and plan to introduce new customs and VAT arrangements instead to level the playing field for high street and UK-based e-commerce businesses, reduce import value manipulation (e.g., splitting shipments), and boost domestic retail

VAT relief for businesses donating goods to charities

Effective from 1 April 2026, the UK government has made changes to the VAT rules in respect of businesses donating goods to charities, to the effect that where charities redistribute the donated goods free of charge (rather than sold them) the donation from the businesses would now benefit from VAT relief at the zero rate. The way the legislation was previously couched created a disincentive, compared to them being disposed as waste.  It is hoped that this change would lead to a reduction in the amount of surplus goods going to the landfill instead of supporting charitable causes.

Changes to the Tour Operators Margin Scheme

The Tour Operators’ Margin Scheme (TOMS) is a special UK VAT scheme for travel and tour operators, allowing VAT to be charged only on the profit margin (difference between selling price and costs) rather than the full value of supplies like holidays or transport. This simplifies VAT recovery and has been exploited by some Private Hire Vehicle Operators (PHVOs)  / Ride-hailing and taxi operators (e.g. Uber, Bolt) to reduce VAT liabilities on passenger fares, creating unfair competition with traditional taxi drivers who pay VAT on the full fare. The tax position for PHVOs has been subject to high-profile litigation in recent years and following on from this, the Chancellor announced changes to how certain PHVOs account for VAT. The changes aim to prevent PHVOs from exploiting the Tour Operator’s Margin Scheme (TOMS).

From 2 January 2026, PHVOs and Taxi services that operate as ‘principal’ would no longer be eligible to declare their VAT via TOMS.  This exclusion does not apply if the journeys are supplied in conjunction with and ancillary to other travel services (e.g. as part of a package holiday including accommodation or flights).

PHVOs and Taxi services acting as ‘agents’ for a named principal or those not using TOMS are unaffected but may benefit indirectly through a more level playing field.

VAT changes to Motability Scheme

The Motability Scheme allows eligible disabled people receiving certain benefits (e.g. Personal Independence Payment or Disability Living Allowance) to lease a vehicle using their mobility allowance. Under previous rules, the scheme benefited from broad VAT reliefs on leasing, including zero-rating on advance “top-up” payments for higher-value vehicles, making it more affordable for users opting for premium models.

The change in the Autumn 2025 budget removes VAT reliefs from any top-up payments on Motability cars with effect from July 2026. In addition, Insurance Premium Tax at the standard rate of 12% will be applied on insurance for vehicles leased through the scheme, with the mileage cap reduced from 20,000 to 15,000 miles, and the overseas breakdown cover on the scheme removed altogether from the standard packages.

Consultation on e-invoicing

The UK government’s push towards e-invoicing builds on Making Tax Digital (MTD) for VAT, aiming to digitize invoicing for efficiency, faster payments, reduced errors, and better VAT compliance. Following a 12-week consultation on e-invoicing, which finished in May 2025, the government confirmed that e-invoicing is to become mandatory for all VAT registered businesses, and that it would apply to B2B and B2G transactions, with all businesses adopting the approved software (yet to be announced).

The implementation timeline as we understand it, is as follows:

• April 2027: Voluntary adoption encouraged; digital prompts in VAT software for incomplete/late returns.
• April 2028: Mandatory for businesses with turnover > £50m (largest 1% of VAT payers).
• April 2029: Full mandate for all VAT-registered businesses.

It is understood that HMRC will issue some guidance on this in January 2026, and that they will seek input from the various stakeholder on technical specs in Spring 2026.

Consultation on land for social housing

The Autumn budget 2025 included several measures impacting social housing, with a focus on increasing supply, providing funding certainty, and addressing affordability challenges. It introduced a new consultation on reforming VAT rules to incentivise the development of land specifically intended for social housing. This aims to reduce costs and barriers for providers bidding into the new Social and Affordable Homes Programme (SAHP) launching in 2026. The consultation is to be published shortly after the budget, with reform being effective from April 2026.

If you’d like to discuss how potential VAT changes could impact your business and would like to discuss any of the points mentioned above further, please get in touch with our VAT team.