Key Indirect Taxes Updates from the Autumn Budget 2025

Employment Taxes Update | General Update

Penalty reform: Updates to the penalty regime for VAT

The government will increase the penalties due for late payment of VAT from 1 April 2027. This will be legislated for via secondary legislation.

While public bodies will already operate robust VAT procedures, the higher penalties mean that any unavoidable delays, such as those arising from system issues or complex transactional workloads, could carry greater financial implications. As a result, authorities may wish to review their existing controls and ensure they remain well positioned to meet statutory deadlines under the updated penalty regime.

Combined County Authorities

Section 9 of the Levelling Up and Regeneration Act 2023 enables the Secretary of State to establish Combined County Authorities, allowing a group of local authorities to pool appropriate responsibility and receive certain delegated functions from local or central government to deliver policy more effectively over a wider area.

Under the section 33 refund scheme, most local government bodies can claim a refund of VAT incurred on purchases of goods and services made to support their statutory non-business activities, if either:

• They’re on the list of eligible bodies
• They have been added by individual Treasury Orders once they’ve been established

Presently, the definition of local authority in section 33 does not include a ‘Combined County Authority’, with the result that it has been necessary to include new bodies by enacting individual Treasury Orders once they have been established.

This measure will add Combined County Authorities to the list of bodies eligible for refunds under section 33 of the Value Added Tax Act 1994.

By adding Combined County Authorities to the list, they’ll no longer need individual Treasury Orders to be eligible for VAT refunds under section 33.

VAT Tour Operators’ Margin Scheme – supplies by private hire vehicle or taxi operators

The Tour Operators Margin Scheme (TOMS) is a special VAT scheme where VAT is only accounted for on the difference between total TOMS income minus total TOMS direct costs for certain travel supplies. VAT is not accounted for on the full price of these particular travel supplies as you would normally expect.

The scheme was intended originally to avoid UK tour operators having to register for VAT separately in the EC when selling travel packages there. It did not originally apply to services of domestic taxi or private hire vehicles (PHV). Since leaving the EC, the UK has its own version of the TOMS that is outlined in detail in public notice 709/5.

Traditionally, PHV and taxi operators have accounted for VAT only on their agency fee unless they act as principal, in which case VAT is due on the full fare. Court rulings (unrelated to VAT) have required operators in London to act as principal in all circumstances, and as a result, several operators attempted to apply UK TOMS. This meant that VAT would only be charged on the margin as opposed to the full price of these services (after paying the driver and not the full fare).

In December 2023, the Tribunal ruled that PHV services could fall within TOMS. HMRC disagreed with this and has since appealed the decision. HMRC maintains that TOMS was never intended for PHV or taxi services and that VAT should be charged in full on these supplies.

Legislative change effective 2 January 2026

To remove uncertainty, the government will amend VAT law so that suppliers of taxi and PHV journeys are excluded from the UK TOMS, subject to a few small exceptions.

This will affect clients whether they use the TOMS or not. If a client is making supplies of PHV or taxi services as principal, they will no longer be required to account for VAT using the TOMS. The supplies will fall under the normal VAT rules, and usually this would be standard rated supply. Conversely, a client could also purchase PHV and taxi services in the course of making other supplies. After 2 January 2026, clients will now receive a VAT invoice for these services, and the VAT will be deductible subject to the normal rules.

Digitalisation

The government has confirmed the long-anticipated introduction of electronic invoicing (e-invoicing) in the UK.

Additional funding will be provided to HMRC to modernise the tax system and help taxpayers get their returns right first time through improved digital services.

This investment will enhance HMRC’s use of third-party data and support the development of new technology, including data-driven prompts designed to reduce errors in tax filings.

From April 2029, electronic invoicing will become mandatory for all VAT invoices for business-to-business and business-to-government transactions, with a detailed implementation roadmap to be published next year.

The introduction of mandatory electronic invoicing from April 2029 will require local authorities to ensure their financial systems can send and receive e-invoices for VAT purposes in business-to-government and business-to-business transactions.

Local authorities with modern finance platforms may find the transition straightforward, while others may need system upgrades or process changes to meet the new requirements. The shift is expected to improve data accuracy, reduce processing times, and support more efficient interactions with suppliers and HMRC.

Motability Scheme: reforming tax reliefs

Welfare benefits used to pay for vehicle leases will continue to be disregarded for VAT, so no VAT is charged on that portion. However, top-up payments made by users who choose higher-value vehicles will no longer be zero-rated and will instead be subject to standard VAT (20%).

Insurance Premium Tax will also be applied at the standard rate of 12% for insurance related to vehicles leased through the scheme.

Vehicles that are designed or permanently adapted for wheelchair or stretcher users remain zero-rated, including any top-up payments.

If residents lease higher-value vehicles and now face VAT on top-up payments and IPT, their overall costs will increase. Some may request additional financial support from the local authority, potentially increasing pressure on budgets.

Local authorities may also experience higher demand on already stretched transport services if residents decide to withdraw from the scheme due to increased costs.

Customs Duties

It was announced that customs duty will now apply to parcels of any value, removing the £135 de minimis tax exemption for overseas importers of low-value products to the UK.

The removal of the £135 de minimis threshold means that all imported parcels will be subject to customs duties, regardless of value.

For local authorities, this is likely to result in higher costs when ordering low-value goods from overseas suppliers.

Local authorities will need to factor potential customs charges into budgets or consider sourcing alternatives within the UK.

Administrative processes may also need minor adjustments to account for duty payments on smaller consignments.

Digital prompts for VAT and Corporation Tax

The government will invest £59 million in new technology over the next five years to provide taxpayers with real-time digital prompts for VAT filing software from April 2027, and Corporation Tax filing software from April 2028.

The planned investment in real-time digital prompts for VAT and Corporation Tax filing software is likely to support local authorities by improving the accuracy and efficiency of their tax processes.

Local authorities will benefit from enhanced VAT filing tools, and their wholly-owned companies, which could be subject to Corporation Tax, may also see reduced errors and smoother compliance through updated software.

Finance teams will need to familiarise themselves with the new features, but overall, the change should help streamline digital interactions with HMRC.

Local Government Pension Scheme Reform: Stamp Duty Land Tax Relief

The government will amend Stamp Duty Land Tax rules, so property transferred within Local Government Pension Schemes is subject to an SDLT relief. This will be legislated in Finance Bill 2026-27.

The change is expected to improve cost-effectiveness and flexibility in property arrangements connected to local government pensions.

VAT treatment of land intended for social housing 

The government will shortly consult on the reform of VAT rules to incentivise the development of land intended for social housing.

Any questions about the Autumn Budget 2025 VAT updates?

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Employment Taxes Update  General Update