Summary of facts
The Claimant, Hotelbeds UK Limited (“Hotelbeds”) is a business which purchases hotel accommodation from UK VAT registered hotels and sells this to other suppliers of hotel accommodation (self-described as a “bed-bank”) for onward distribution.
Hotelbeds made standard rated supplies of hotel accommodation to its business customers and paid VAT on the purchase of hotel rooms from its suppliers. Under normal VAT principles Hotelbeds could deduct the input tax paid on the purchase of hotel rooms. However, Hotelbeds had difficulties obtaining VAT invoices from its suppliers to support its input tax deductions.
Hotelbeds’ practice (in accordance with the industry norm) was to pay for hotel rooms by means of a virtual credit card when the hotel guest checked in or checked out of the hotel (not following issue of a VAT invoice by its suppliers). Despite the suppliers being legally obliged to issue a VAT invoice, this was rarely done in practice. It was not disputed that Hotelbeds made some efforts to obtain the VAT invoices from its suppliers, but HMRC’s position was that Hotelbeds could have tried harder to obtain the VAT invoices but did not.
Hotelbeds submitted two Error Correction Notices (“ECNs”) to HMRC to recover the input tax, but the ECNs were rejected by HMRC on the basis that Hotelbeds had “systematically failed” to obtain valid VAT invoices. This was despite HMRC making input tax repayments in relation to two ECNs submitted for earlier VAT periods on the same facts.
Under Regulation 29 Value Added Tax Regulations 1995, HMRC has a discretion to allow claims for input tax which are not supported by a valid VAT invoice where the taxpayer holds other evidence of the VAT charge. Hotelbeds relied on three policy documents published by HMRC which deal with the application of HMRC’s discretion: VIT31200; HMRC’s Statement of Practice dated March 2007 (the “SOP”); and VAT Notice 700.
Hotelbeds particularly relied on VIT31200 which stated, “where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.”
Hotelbeds brought a judicial review claim against HMRC on the basis that HMRC’s refusals to allow the deductions was unlawful because i) HMRC failed to apply their own guidance, ii) alternatively, it had a “legitimate expectation” that it would be entitled to deduct input tax based on statements in HMRC’s guidance; the SOP; and / or because HMRC accepted two earlier ECNs on the same facts, and iii) the HMRC
decision was “irrational” given that there was sufficient evidence of the relevant supplies.
What did the Court decide?
The Court determined that none of the three HMRC policy documents were drafted with a “no invoice” situation in mind. Instead, they each make references to circumstances where a taxpayer has an “invalid invoice” which did not apply in this case. Therefore, given the absence of any directly applicable policy the Court determined that, “the [HMRC] decision maker was required to go back to the scope of the discretion and to judge the request made against the principles of the tax and HMRC’s duty to protect the revenue.”
The Court concluded that:
· HMRC’s guidance was “inconsistent, ambiguous and, in [the Court’s] judgment, difficult for a decision-maker to navigate.”
· In relying upon the written policy contained in VAT Notice 700 HMRC has misconstrued and/or misapplied its own policy.
· The strong driver against recovery without a valid invoice is fraud but there was no real risk of fraud in this case
· The Court did not agree with HMRC that a “systematic” failure to obtain VAT invoices meant simply a “repeated” failure.
· The Court held that HMRC’s decision “erred in law” because it “failed to take the principles of neutrality and the right to deduct properly into account.”
· HMRC’s refusal was inconsistent with the payment of earlier ECNs and was “unfair and unreasonable, and unsustainable in public law terms.”
On that basis Hotelbeds’ application for judicial review was allowed. The Court did not consider it necessary to deal with Hotelbeds’ “legitimate expectation” argument because Hotelbeds succeeded on its main argument.
Comment
Hotelbeds main argument was that HMRC had not followed its own guidance. However, HMRC’s guidance is not law, rather it contains HMRC’s interpretation of the law and how the law should be applied. It is not unknown for HMRC to take a position which is contrary to its own guidance.
Unfortunately the Court did not rule expressly on the legitimate expectation argument, which put on the wider basis obliges HMRC as a matter of public law to exercise a discretion in a manner that is consistent with its “acknowledged duty to act fairly and in accordance with the highest public standards.”- per Sir Thomas Bingham MR in Unilever
(1996) STC 681), albeit it might well have reached the same decision. Whilst acknowledging the centrality of the invoice to the VAT system, this case involved similar claims from the Claimant being accepted in the past, HMRC being in a net positive position as regards the tax it received – contrary to the “adventitious windfall” in Unilever – here there was adequate evidence of the transactions in question, no risk of fraud and no risk of the issue continuing in future periods owing to a change of system. It is difficult to see how an HMRC officer properly instructed as to the true scope of the discretion could have reached the same decision rationally.
New residence-based tax regime: FA 2025 fundamentally changed the UK tax regime for individuals formerly known as non-UK doms. The legislation enacting the various changes is extremely complex and, given the time pressure for enactment, inevitably littered with technical anomalies. Some tweaks have emerged in the L-Day papers published yesterday, albeit we are reading from the Parliamentary Statement rather than draft legislation. We understand that:
· The inheritance tax spousal election for non-long term UK resident spouses (i.e. those who are not within the scope of worldwide IHT) to benefit from the full spousal exemption where the spouse that has died was a long-term UK resident (thus within the scope of worldwide IHT). The legislation will be amended so the election lapses, as intended, after ten consecutive years of non-residence.
· The Temporary Repatriation Facility was extended to income and gains pools with respect to trusts that were previously settled overseas and had become UK resident (referred to in the legislation as migrant settlements). Amendments will be enacted to ensure that the legislation works as intended for offshore income gains and migrant settlements.
We are still awaiting further detail beyond what was announced yesterday in this space. Some dramatic U-turns would be most welcome!
Offshore anti-avoidance provisions: No consultation document on the offshore anti-avoidance provisions has emerged yet but a summary of responses was published this week, and further consultation will follow. An update is expected in the Autumn Budget 2025 and any changes to the legislation are not now expected to be in place before 2027/28.
In other measures: We also know that ITEPA 2003 s 690 (internationally mobile employees: where PAYE is operated on only the proportion of the employees’ income that relates to UK duties) will be amended so that the present concessionary inclusion of treaty non-residence will be included within the legislation.
In the world of APR/BPR, there were no fundamental changes to what was announced at Autumn Budget 2024 but it was announced that IHT can be paid by ten interest free equal annual instalments where the property qualifies for either APR and/or BPR. In addition:
· The draft legislation makes provision for the £1m 100% relief allowance to increase in line with indexation – by reference to the consumer price index – from 6 April 2030.
· As with the nil rate band, the 100% relief allowance for individuals is refreshed every seven years.
· For relevant property trusts, the 100% trust relief allowance refreshes after each ten-year anniversary. IHTA 1984 s 69 is amended so that all relevant property trust exit charges are calculated based on the value of trust property before APR and/or BPR regardless of whether the exit takes place before or after the first ten-year anniversary.
· Anti-fragmentation rules will mean that, for trusts created on or after 30 October 2024, the £1m allowance will be divided up between trusts created on or after 30 October 2024 by the same settlor (as per IHTA 1984 new s 124F).
· IHTA 1984 s 131 (relief for transfers within seven years of death) is to be amended such that where the market value of property has fallen between the time of a lifetime gift and death, the lower value is automatically taken into account.
IHT and pensions: The draft legislation for the IHT pension changes effective from 6 April 2027 was published along with a response to the technical consultation.
· Personal representatives and not pension scheme administrators will be responsible for reporting and paying the IHT on any unused pension funds and death benefits from 6 April 2027. HMRC will continue to work with industry experts to develop and refine how the process will work with a view to addressing issues the PRs will face.
· Death in service benefits payable from registered pension schemes should not be within the scope of IHT.
Original article can be found here: Legislation Day 2025: Private Client Perspective (taxjournal.com)
SUMMARY
In Standish v Standish [2025] UKSC 26, the Supreme Court has unanimously upheld the decision from the Court of Appeal that the transfer of pre-marital assets for the purpose of inheritance tax planning did not matrimonialise those assets and that the sharing principle should not apply.
The key takeaways from the judgment are:
· Non matrimonial assets are definitively off the table for the purposes of the sharing principle.
· When determining matrimonial property, it is the source not the title of the asset that is important.
· Pre-marital assets can be matrimonialised where the spouses have been treating those assets as shared over time.
· Transferring assets to one’s spouse for the purposes of tax/business planning is not determinative of those assets being treated as shared.
BACKGROUND FACTS
Standish v Standish focuses on the transfer of c.£80m of assets from Husband to Wife in 2017. This transfer was part of a tax planning exercise to take advantage of Wife’s non-dom status in the UK. The intention was for her to establish offshore trusts for the benefit of their children with those assets.
These assets derived from the Husband’s pre-martial wealth, generated throughout his successful career in the financial services industry from which he retired in 2007, having married in 2005.
CASE LAW
There are three principles established by case law which are applicable to financial remedy proceedings; the Needs Principle, the Compensation Principle and the Sharing Principle.
The Needs and Compensation principles were not addressed in this judgment, however we mention for completeness as non-matrimonial assets may still be awarded under these principles. The Needs Principle looks at the financial needs of each party in the foreseeable future and the Compensation Principle looks at “relationship-generated disadvantage”, such as giving up a career to bring up children.
The Sharing Principle was established in White v White [2001] 1 AC 596, a landmark case which changed the landscape of settlements under divorce. It levelled the playing field between the “bread-maker” and the “home-maker”, treating both parties as equally entitled to wealth generated throughout the marriage.
In Miller v Miller; McFarlane v McFarlane [2006] UKHL24, the court held that only matrimonial property should be subject to the sharing principle. Matrimonial property is a term applied typically to assets that are earned or gained during the course of the marriage. Conversely, non-matrimonial property typically applies to assets which were held prior to the marriage or acquired by way of gift/inheritance.
The concept of matrimonialisation was coined by Roberts J in WX v HX [2021] EWHC 24, to describe the circumstance whereby non-matrimonial assets become matrimonial assets. While this had been explored previously, in K v L [2011] EWCA Civ 550, Wilson LJ sought to lay guidelines as to the situations where this may occur as follows:
1. Where the relevant assets cease to be of significant value in relation to matrimonial property.
2. Where the relevant assets are mixed in with matrimonial property and it is accepted that the contributing spouse would view those assets as matrimonial property.
3. Where the contributing spouse has chosen to invest the assets in the matrimonial home.
The Supreme Court looked to these historic cases in its judgment.
THE JUDGMENT
The essential question considered in the Supreme Court was whether the 2017 assets were matrimonial property and so subject to the Sharing Principle. The Supreme Court took the opportunity, to the delight of private client practitioners, to explicitly confirm what was already widely understood that the Sharing Principle should only apply to matrimonial assets. The judgment reads; ‘the time has come to make clear that non-matrimonial property should not be subject to the sharing principle’.
The Supreme Court upheld the Court of Appeal’s assessment that 25% of the £80m comprised matrimonial property however disagreed with the basis on which it had not been matrimonialised. The Court of Appeal had looked to the list provided in K v L and on the basis that none of the scenarios described were applicable here the Court ruled that the assets had not become matrimonial property. The Supreme Court stated that the list was not intended to be exclusive and provided a broader explanation of the term: ‘what is important (….) is to consider how the parties have been dealing with the asset and whether this shows that, over time, they have been treating the asset as
shared between them. That is, matrimonialisation rests on the parties, over time, treating the asset as shared.’
The Wife contended that by virtue of the 2017 transfer, the assets had been shared between her and her husband however the Supreme Court ruled that the intention was clearly to save tax and that a benefit to the family is not synonymous with a shared benefit between the spouses. Whoever has the title to property is not determinative in the matrimonial character of that property.
Summary of facts
The Claimant, Hotelbeds UK Limited (“Hotelbeds”) is a business which purchases hotel accommodation from UK VAT registered hotels and sells this to other suppliers of hotel accommodation (self-described as a “bed-bank”) for onward distribution.
Hotelbeds made standard rated supplies of hotel accommodation to its business customers and paid VAT on the purchase of hotel rooms from its suppliers. Under normal VAT principles Hotelbeds could deduct the input tax paid on the purchase of hotel rooms. However, Hotelbeds had difficulties obtaining VAT invoices from its suppliers to support its input tax deductions.
Hotelbeds’ practice (in accordance with the industry norm) was to pay for hotel rooms by means of a virtual credit card when the hotel guest checked in or checked out of the hotel (not following issue of a VAT invoice by its suppliers). Despite the suppliers being legally obliged to issue a VAT invoice, this was rarely done in practice. It was not disputed that Hotelbeds made some efforts to obtain the VAT invoices from its suppliers, but HMRC’s position was that Hotelbeds could have tried harder to obtain the VAT invoices but did not.
Hotelbeds submitted two Error Correction Notices (“ECNs”) to HMRC to recover the input tax, but the ECNs were rejected by HMRC on the basis that Hotelbeds had “systematically failed” to obtain valid VAT invoices. This was despite HMRC making input tax repayments in relation to two ECNs submitted for earlier VAT periods on the same facts.
Under Regulation 29 Value Added Tax Regulations 1995, HMRC has a discretion to allow claims for input tax which are not supported by a valid VAT invoice where the taxpayer holds other evidence of the VAT charge. Hotelbeds relied on three policy documents published by HMRC which deal with the application of HMRC’s discretion: VIT31200; HMRC’s Statement of Practice dated March 2007 (the “SOP”); and VAT Notice 700.
Hotelbeds particularly relied on VIT31200 which stated, “where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.”
Hotelbeds brought a judicial review claim against HMRC on the basis that HMRC’s refusals to allow the deductions was unlawful because i) HMRC failed to apply their own guidance, ii) alternatively, it had a “legitimate expectation” that it would be entitled to deduct input tax based on statements in HMRC’s guidance; the SOP; and / or because HMRC accepted two earlier ECNs on the same facts, and iii) the HMRC
decision was “irrational” given that there was sufficient evidence of the relevant supplies.
What did the Court decide?
The Court determined that none of the three HMRC policy documents were drafted with a “no invoice” situation in mind. Instead, they each make references to circumstances where a taxpayer has an “invalid invoice” which did not apply in this case. Therefore, given the absence of any directly applicable policy the Court determined that, “the [HMRC] decision maker was required to go back to the scope of the discretion and to judge the request made against the principles of the tax and HMRC’s duty to protect the revenue.”
The Court concluded that:
· HMRC’s guidance was “inconsistent, ambiguous and, in [the Court’s] judgment, difficult for a decision-maker to navigate.”
· In relying upon the written policy contained in VAT Notice 700 HMRC has misconstrued and/or misapplied its own policy.
· The strong driver against recovery without a valid invoice is fraud but there was no real risk of fraud in this case
· The Court did not agree with HMRC that a “systematic” failure to obtain VAT invoices meant simply a “repeated” failure.
· The Court held that HMRC’s decision “erred in law” because it “failed to take the principles of neutrality and the right to deduct properly into account.”
· HMRC’s refusal was inconsistent with the payment of earlier ECNs and was “unfair and unreasonable, and unsustainable in public law terms.”
On that basis Hotelbeds’ application for judicial review was allowed. The Court did not consider it necessary to deal with Hotelbeds’ “legitimate expectation” argument because Hotelbeds succeeded on its main argument.
Comment
Hotelbeds main argument was that HMRC had not followed its own guidance. However, HMRC’s guidance is not law, rather it contains HMRC’s interpretation of the law and how the law should be applied. It is not unknown for HMRC to take a position which is contrary to its own guidance.
Unfortunately the Court did not rule expressly on the legitimate expectation argument, which put on the wider basis obliges HMRC as a matter of public law to exercise a discretion in a manner that is consistent with its “acknowledged duty to act fairly and in accordance with the highest public standards.”- per Sir Thomas Bingham MR in Unilever
(1996) STC 681), albeit it might well have reached the same decision. Whilst acknowledging the centrality of the invoice to the VAT system, this case involved similar claims from the Claimant being accepted in the past, HMRC being in a net positive position as regards the tax it received – contrary to the “adventitious windfall” in Unilever – here there was adequate evidence of the transactions in question, no risk of fraud and no risk of the issue continuing in future periods owing to a change of system. It is difficult to see how an HMRC officer properly instructed as to the true scope of the discretion could have reached the same decision rationally.
New residence-based tax regime: FA 2025 fundamentally changed the UK tax regime for individuals formerly known as non-UK doms. The legislation enacting the various changes is extremely complex and, given the time pressure for enactment, inevitably littered with technical anomalies. Some tweaks have emerged in the L-Day papers published yesterday, albeit we are reading from the Parliamentary Statement rather than draft legislation. We understand that:
· The inheritance tax spousal election for non-long term UK resident spouses (i.e. those who are not within the scope of worldwide IHT) to benefit from the full spousal exemption where the spouse that has died was a long-term UK resident (thus within the scope of worldwide IHT). The legislation will be amended so the election lapses, as intended, after ten consecutive years of non-residence.
· The Temporary Repatriation Facility was extended to income and gains pools with respect to trusts that were previously settled overseas and had become UK resident (referred to in the legislation as migrant settlements). Amendments will be enacted to ensure that the legislation works as intended for offshore income gains and migrant settlements.
We are still awaiting further detail beyond what was announced yesterday in this space. Some dramatic U-turns would be most welcome!
Offshore anti-avoidance provisions: No consultation document on the offshore anti-avoidance provisions has emerged yet but a summary of responses was published this week, and further consultation will follow. An update is expected in the Autumn Budget 2025 and any changes to the legislation are not now expected to be in place before 2027/28.
In other measures: We also know that ITEPA 2003 s 690 (internationally mobile employees: where PAYE is operated on only the proportion of the employees’ income that relates to UK duties) will be amended so that the present concessionary inclusion of treaty non-residence will be included within the legislation.
In the world of APR/BPR, there were no fundamental changes to what was announced at Autumn Budget 2024 but it was announced that IHT can be paid by ten interest free equal annual instalments where the property qualifies for either APR and/or BPR. In addition:
· The draft legislation makes provision for the £1m 100% relief allowance to increase in line with indexation – by reference to the consumer price index – from 6 April 2030.
· As with the nil rate band, the 100% relief allowance for individuals is refreshed every seven years.
· For relevant property trusts, the 100% trust relief allowance refreshes after each ten-year anniversary. IHTA 1984 s 69 is amended so that all relevant property trust exit charges are calculated based on the value of trust property before APR and/or BPR regardless of whether the exit takes place before or after the first ten-year anniversary.
· Anti-fragmentation rules will mean that, for trusts created on or after 30 October 2024, the £1m allowance will be divided up between trusts created on or after 30 October 2024 by the same settlor (as per IHTA 1984 new s 124F).
· IHTA 1984 s 131 (relief for transfers within seven years of death) is to be amended such that where the market value of property has fallen between the time of a lifetime gift and death, the lower value is automatically taken into account.
IHT and pensions: The draft legislation for the IHT pension changes effective from 6 April 2027 was published along with a response to the technical consultation.
· Personal representatives and not pension scheme administrators will be responsible for reporting and paying the IHT on any unused pension funds and death benefits from 6 April 2027. HMRC will continue to work with industry experts to develop and refine how the process will work with a view to addressing issues the PRs will face.
· Death in service benefits payable from registered pension schemes should not be within the scope of IHT.
Original article can be found here: Legislation Day 2025: Private Client Perspective (taxjournal.com)
SUMMARY
In Standish v Standish [2025] UKSC 26, the Supreme Court has unanimously upheld the decision from the Court of Appeal that the transfer of pre-marital assets for the purpose of inheritance tax planning did not matrimonialise those assets and that the sharing principle should not apply.
The key takeaways from the judgment are:
· Non matrimonial assets are definitively off the table for the purposes of the sharing principle.
· When determining matrimonial property, it is the source not the title of the asset that is important.
· Pre-marital assets can be matrimonialised where the spouses have been treating those assets as shared over time.
· Transferring assets to one’s spouse for the purposes of tax/business planning is not determinative of those assets being treated as shared.
BACKGROUND FACTS
Standish v Standish focuses on the transfer of c.£80m of assets from Husband to Wife in 2017. This transfer was part of a tax planning exercise to take advantage of Wife’s non-dom status in the UK. The intention was for her to establish offshore trusts for the benefit of their children with those assets.
These assets derived from the Husband’s pre-martial wealth, generated throughout his successful career in the financial services industry from which he retired in 2007, having married in 2005.
CASE LAW
There are three principles established by case law which are applicable to financial remedy proceedings; the Needs Principle, the Compensation Principle and the Sharing Principle.
The Needs and Compensation principles were not addressed in this judgment, however we mention for completeness as non-matrimonial assets may still be awarded under these principles. The Needs Principle looks at the financial needs of each party in the foreseeable future and the Compensation Principle looks at “relationship-generated disadvantage”, such as giving up a career to bring up children.
The Sharing Principle was established in White v White [2001] 1 AC 596, a landmark case which changed the landscape of settlements under divorce. It levelled the playing field between the “bread-maker” and the “home-maker”, treating both parties as equally entitled to wealth generated throughout the marriage.
In Miller v Miller; McFarlane v McFarlane [2006] UKHL24, the court held that only matrimonial property should be subject to the sharing principle. Matrimonial property is a term applied typically to assets that are earned or gained during the course of the marriage. Conversely, non-matrimonial property typically applies to assets which were held prior to the marriage or acquired by way of gift/inheritance.
The concept of matrimonialisation was coined by Roberts J in WX v HX [2021] EWHC 24, to describe the circumstance whereby non-matrimonial assets become matrimonial assets. While this had been explored previously, in K v L [2011] EWCA Civ 550, Wilson LJ sought to lay guidelines as to the situations where this may occur as follows:
1. Where the relevant assets cease to be of significant value in relation to matrimonial property.
2. Where the relevant assets are mixed in with matrimonial property and it is accepted that the contributing spouse would view those assets as matrimonial property.
3. Where the contributing spouse has chosen to invest the assets in the matrimonial home.
The Supreme Court looked to these historic cases in its judgment.
THE JUDGMENT
The essential question considered in the Supreme Court was whether the 2017 assets were matrimonial property and so subject to the Sharing Principle. The Supreme Court took the opportunity, to the delight of private client practitioners, to explicitly confirm what was already widely understood that the Sharing Principle should only apply to matrimonial assets. The judgment reads; ‘the time has come to make clear that non-matrimonial property should not be subject to the sharing principle’.
The Supreme Court upheld the Court of Appeal’s assessment that 25% of the £80m comprised matrimonial property however disagreed with the basis on which it had not been matrimonialised. The Court of Appeal had looked to the list provided in K v L and on the basis that none of the scenarios described were applicable here the Court ruled that the assets had not become matrimonial property. The Supreme Court stated that the list was not intended to be exclusive and provided a broader explanation of the term: ‘what is important (….) is to consider how the parties have been dealing with the asset and whether this shows that, over time, they have been treating the asset as
shared between them. That is, matrimonialisation rests on the parties, over time, treating the asset as shared.’
The Wife contended that by virtue of the 2017 transfer, the assets had been shared between her and her husband however the Supreme Court ruled that the intention was clearly to save tax and that a benefit to the family is not synonymous with a shared benefit between the spouses. Whoever has the title to property is not determinative in the matrimonial character of that property.
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