The budget’s hidden VAT implications

The Chancellor confirmed in her November 2025 budget statement that there would be no changes to the VAT registration threshold or to the rate of VAT. This initially suggested VAT would escape this budget with little to no impact.

However, the situation is far from straightforward. As with every budget, it is not until you delve into the detail that you realise how VAT will be impacted by the new policy announcements.

Rachel Reeves indirectly mentioned VAT when suggesting the Government’s intentions to tackle an issue surrounding certain taxi companies using the Tour Operators Margin Scheme (TOMS), by implementing changes to the definition of a tour operator.

In addition to TOMS, other areas affected include the VAT treatment of Motability leases and VAT relief on goods donated to charities. Although the information is sparce at present and a lot of these changes are planned for some time in the future, we cover the key VAT points for businesses below:

Tour Operators’ Margin Scheme (TOMS)

These changes will take effect from 2nd January 2026.

Currently some taxi operators are accounting for VAT on their sales under TOMS and in effect only accounting for VAT on their profit element. This has always been a matter we have thought HMRC would try to challenge these companies on. It seems they are now clarifying the definition of a tour operator and Section 53 of the VAT Act 1994 is to be amended to specifically exclude suppliers of taxi and private hire vehicle journeys from this definition. This will mean a taxi firm will have to account for VAT on the full value of the supply.

VAT Tour Operators’ Margin Scheme — supplies by private hire vehicle or taxi operators - GOV.UK

VAT relief for business donations on goods to charities

These changes will take effect from 1st April 2026.

Under current rules businesses can gift goods to charities and treat that gift of goods as a zero-rated supply so long as the goods are to be sold, let or exported by the charity they were gifted to. This was quite restrictive and meant if charities were to keep those goods for their own purposes, or even give away themselves, the donor generally had to account for VAT on them. The new measure seems to remove some restrictions and suggests the donor will now be able to benefit from VAT relief on ‘eligible’ goods that are donated to the charity either for onward distribution by that charity or for their own use. The current policy paper also indicates that there will be a value limit to the total amount that can be donated but as yet we do not have this level of detail. HMRC should release further guidance nearer the time that will confirm what items are classed as eligible goods and also the value limits involved.

VAT relief for business donations on goods to charities - GOV.UK

Motability Scheme

These changes will take effect from 1st July 2026.

The announcement to stop higher value vehicles being available on the Motability scheme does appear to have a VAT consequence. Under some agreements it is possible for people receiving benefits for Motability lease payments to pay a top up in addition to their benefits to obtain a higher value vehicle on lease. VAT would not currently be charged on these lease payments.

However, as a result of the Chancellor’s announcement, which is said to try to stop higher value cars being supplied under Motability, any top up payments made over and above the benefits the claimant receives, from either Department for Work and Pensions, the Ministry of Defence, Social Security Scotland, or the Department for Communities (Northern Ireland), will now be subject to 20% VAT. This measure removes the zero rating provisions in Item 14 of Schedule 8 to essentially treat this as a hire of a qualifying vehicle but there is also a new valuation provision being added to Schedule 6 which will disregard the element of the payment for the lease that is provided by a customer’s benefit entitlement when valuing the supply that would be subject to VAT resulting in no VAT charge due on the element of the lease paid for by benefits.

Motability Scheme: reforming tax reliefs - GOV.UK

Combined County Authorities VAT refunds

These changes will take effect from 1st December 2025.

Currently only certain government bodies can make a claim for VAT on goods or services that is incurred in the course of their non business activities under Section 33 of the VAT Act 1994. Under Section 9 of the Levelling Up and Regeneration Act 2023, the Secretary of State established Combined County Authorities. However, the definition of Local Authority in Section 33 does not currently include ‘Combined County Authority’. As a result, this new measure proposes to introduce new legislation in the Finance Bill 2025-26 to amend Section 33(3) to include Combined County Authorities and will remove the need to individually specify newly established Combined Authorities by Treasury order.

Combined County Authorities VAT refunds under section 33 of the VAT Act 1994 - GOV.UK

This was an eventful budget, with many hidden implications that will begin to reveal themselves over time. VAT is one of those and we can immediately see that businesses will be faced by some new and challenging issues following yesterday’s announcement.

Should you or your clients need any assistance with any of the above, please get in touch with us at taxconsultancyuk@markel.com.