Helpsheets ... continued 50 from homepage

VAT-registered businesses can generally reclaim VAT on goods and services purchased for business purposes. However, for a claim to succeed HMRC requires valid evidence to support those claims. In most cases, this means retaining a valid VAT invoice, but what is the situation should a full VAT invoice not be issued?

An invalid VAT invoice

A VAT invoice must contain specific information, including the supplier’s details, a unique sequential number, the VAT registration number, invoice date, the customer’s name and address, description of goods or services supplied, the VAT rate charged, the net of VAT amount payable and total gross amount payable. A recent tax case, Athena Luxe Ltd v HMRC [2025], serves as a reminder of these requirements. However, where a fully compliant invoice cannot be obtained, all is not necessarily lost. The tax case confirmed that HMRC cannot automatically reject a VAT claim simply because a supplier has failed or refused to issue a compliant invoice if there is other convincing evidence showing that the business genuinely incurred the VAT.

Common examples of invalid invoices include those that:

• omit the supplier’s VAT registration number;
• fail to show the VAT amount separately;
• lack sufficient detail about the goods or services supplied; or
• have inaccuracies regarding dates, values or parties involved.

Crucially, where a business seeks to recover VAT, the invoice should normally be addressed to that business. Problems can arise when invoices are issued in the name of a company director, an employee or another party rather than the VAT-registered business, as the tax case showed.

Athena Luxe Ltd v HMRC [2025] UKFTT 1507 (TC)

Athena Luxe Ltd bought luxury goods from UK traders and exported them overseas. As these sales were mainly zero-rated exports, it regularly reclaimed VAT on its purchases. HMRC reviewed its VAT returns and disallowed input VAT because it said some invoices were invalid. Some invoices lacked sufficient description of the goods purchased whilst others were issued in employees’ names rather than the company’s. When asked, the issuing company refused to issue in the correct (company) name.

The Tribunal found in favour of Athena Luxe and allowed the VAT recovery. It confirmed that HMRC must consider all evidence before making its decision. Where an invoice was incomplete, a matching till receipt showed that the item had been purchased. For invoices in employees’ names, the Tribunal accepted that the company had genuinely bought the goods for its business, paid for them through the company and had done all it could to obtain valid invoices. HMRC's refusal to exercise its discretion to accept alternative evidence was found to be unreasonable.

Note that this tax case was a First-tier Tribunal decision, so it is persuasive but not binding on all future cases.

E-invoicing

E-invoicing is likely to make the problems seen in Athena Luxe Ltd v HMRC less common. Under a typical e-invoicing system, invoice data is generated in a structured digital format rather than as a PDF or paper receipt, containing the same information as paper invoices.

From April 2029, all UK VAT registered businesses will be required to create, send, receive and process invoices to other businesses in a compliant electronic format. This will allow data to be read automatically by systems without manual intervention.

Although the use of e-invoicing should produce fewer defective invoices, HMRC may become less tolerant of basic invoice errors because they become easier to avoid. Disputes may focus more on the substance of the transaction.

Practical point

Where invoices contain errors, businesses should seek corrected documentation from suppliers as soon as possible. Relying on HMRC’s discretion is rarely desirable. Additional records (e.g. bank statements, expense claim records, purchase orders, contracts, email correspondence, delivery notes and receipts) can help demonstrate that a genuine business transaction took place and that VAT was properly incurred.

Landlords running an unincorporated property business obtain relief for interest and finance costs incurred in relation to residential lets (including holiday lets) as a tax reduction.

The tax reduction is 20% of the lower of the:

• interest and finance costs;
• the profits of the property business for the tax year (after any brought forward losses); and
• adjusted total income (income after losses and reliefs that exceeds the personal allowance).

The deduction cannot create a tax refund.

If the interest and finance costs are higher than the business profits and/or the landlord’s adjusted total income, the interest and finance costs will not be relieved in full in the year in which they were incurred. Where this is the case, the unrelieved interest and finance costs are carried forward.

Example

Ali has a house which he lets out. He has a mortgage on the property on which he pays interest of £10,000 a year.

In 2025/26, the profits from his property rental business were £8,000. His adjusted net income was £25,430.

Ali is able to claim a tax reduction in respect of his interest costs equal to 20% of the lower of:

£10,000 (interest and finance costs);

£8,000 (profits of the property business); and

£25,430 (adjusted net income).

His tax reduction is £1,600 (20% of £8,000).

As his business profits are less than his interest costs, he is not able to relieve the interest in full. The unused amount (£2,000) is carried forward.

In 2026/27, Ali’s interest remains at £10,000. However, this year the profits of his property rental business are £13,000 and his adjusted net income is £36,000. He is able to claim a tax reduction of 20% of the lower of:

£12,000 (interest costs, being £2,000 brought forward from 2025/26 and £10,000 for 2026/27);

£13,000 (profits of the property rental business); and

£36,000 (adjusted net income).

His tax reduction is £2,400 (20% of the interest costs of £12,000). In 2026/27, he is able to secure relief both for the interest incurred in that year of £10,000 and the unrelieved interest of £2,000 brought forward from 2025/26.

Convention has it that in times of high interest rates, borrowing from your company is invariably more tax efficient than borrowing from other sources such as a bank. However, this may not always be the case. If the loan cannot be repaid within nine months and one day after the company's accounting year end, the company will be liable for a tax charge equal to the dividend upper rate (35.75%). Without this charge, the director could borrow money from the company indefinitely without ever paying income tax or NIC on the amount withdrawn. In addition, where a beneficial loan exists, the director may face an income tax charge on the benefit, while the company pays Class 1A NIC. This applies regardless of whether the loan is repaid.

Company charge

The tax charge is technically temporary as, should the company be liable, the payment will be refunded when the loan is repaid (or written off.) The refund is usually offset against the corporation tax bill due, nine months and one day after the accounting year end in which the loan is repaid, with no interest received. If no corporation tax is due and a cash refund required, HMRC will not refund until after the same nine-month period has passed. This delay could create serious cash flow problems for the company.

Director’s charge

A separate set of rules applies entirely independently of the company’s charge, designed to catch the benefit to the director of having an interest-free (or below-market-rate) loan. If the loan balance exceeds £10,000 at any point during the tax year (even for one day), the director is treated as receiving a taxable benefit in kind equal to the notional interest on the loan, calculated using HMRC's official rate (currently 3.75%). Income tax is levied at the director’s marginal tax rate on the difference between any interest charged and the 'official rate', such loans termed 'beneficial loans'. The company must also pay Class 1A NIC at 15% on the same amount.

The benefit in kind and employer's NIC can be avoided by levying interest on the loan at the official rate (or above), even if rolled up in the loan, rather than immediately paid. If the 'official rate' is charged, borrowing from the company is cheaper than a bank loan or credit card.

Planning to clear the loan

Not repaying the loan on time can produce significant tax charges on both the company and the individual. Therefore, unless repayment is made on the sale or winding-up of the company, settlement will have to come from personal savings, by taking taxable income from the company (e.g. dividend) or by further external borrowing. In practice, paying a bonus or dividend to clear the loan is the cleanest route, but this triggers income tax (on a bonus) or dividend tax, so the ‘free loan’ turns out not to have been free at all.

For a basic taxpayer, it would be cheaper to convert the loan into a dividend taxed at 10.75% rather than have the company pay the 35.75% charge. Conversely, where the director is an additional rate taxpayer, it may be cheaper for the company to suffer the charge, as this is ultimately repayable when the loan is repaid or written off. For a higher rate taxpayer there would be no difference. However, even when tax does have to be paid, the shareholder can still end up with more initial funds through a loan than through additional salary or dividends, having benefited from interest-free or low-interest borrowing in the meantime.

Some directors repay using borrowed money by taking out a personal loan or 0% credit card, repaying over time. This can work, but needs careful planning, as personal loans carry interest costs and 0% credit card deals have time limits.

Practical point

Borrowing from the company only makes sense for basic rate taxpayers who require short-term loans e.g. where a dividend will be declared shortly after year end and the loan cleared promptly. Treated as a long-term financing tool, it is almost never tax efficient. However, the s455 charge is only temporary and any benefit in kind may be less than the cost of external borrowing.

HMRC use a range of communication methods, as do fraudsters. Consequently, it can be difficult to be certain that a call, email, letter or text which seems to come from HMRC actually does. How then do you tell if the communication is genuine?

Phone calls

Scammers may pretend that they are from HMRC and try to extract a person’s bank details by telling them that they are entitled to a tax refund. This should set warning bells ringing – HMRC will never phone someone to tell them that they are entitled to a tax rebate or that they are to be charged a penalty, or to ask for personal information.

Not all calls purporting to be from HMRC will be a scam. However, to help callers identify whether a call is genuine, HMRC publish details of their current phone contacts. The list is available on the Gov.uk website at www.gov.uk/guidance/check-if-a-phone-call-youve-received-from-hmrc-is-genuine.

However, a missed call or voicemail from 0300 200 3884 is from HMRC.

Emails

Scammers also send emails purporting to be from HMRC. However, as with phone calls, HMRC publish a list of recent email topics, which can be found of the Gov.uk website at www.gov.uk/guidance/check-if-an-email-youve-received-from-hmrc-is-genuine.

It is advisable not to open a link in an email.

Letters

HMRC may write to taxpayers. However, it is prudent to check that a letter which seems to be from HMRC actually is. HMRC publish a list of recent letters that they are sending out, details of which can be found on the Gov.uk website at www.gov.uk/guidance/check-if-a-letter-youve-received-from-hmrc-is-genuine. Examples of genuine letters include Letter IDMS99P which tells someone that they have an overdue payment on a Simple Assessment and Letter IDMS99 which tells someone that they have a payment which is overdue. HMRC may also reply to correspondence by letter.

Texts

HMRC do communicate by text, for example, to follow up a call to a helpline or to advise someone that their Self-Assessment refund is being processed. Some texts may have HMRC branding which will show HMRC as the sender, include the HMRC logo and contain the verified sender information.

As with other forms of communication, HMRC publish details of recent text contact on the Gov.uk website (see www.gov.uk/guidance/check-if-a-text-message-youve-received-from-hmrc-is-genuine).

HMRC will never ask for personal information in a text.

While a text from HMRC may include a link to the Gov.uk website or to a webchat, recipients should not open any links or reply to a text that claims to be from HMRC and offers a tax refund in exchange for personal information.

QR code

Leaflets and letters from HMRC may contain a QR code which can be scanned to access further information or help. Details of genuine letters from HMRC containing a QR code can be found on the Gov.uk website at www.gov.uk/guidance/check-if-a-qr-code-on-a-letter-youve-received-from-hmrc-is-genuine.

More than one method of communication

HMRC may use more than one method to communicate with a taxpayer, for example, a letter followed by a phone call. Details of current contacts using more than one method of communication can be found on the Gov.uk website at www.gov.uk/guidance/check-genuine-hmrc-contact-that-uses-more-than-one-communication-method.

Reporting suspicious communication

Scam text and email messages and scam social media accounts claiming to be from HMRC should be reported. Scam emails should be forwarded to phishing@hmrc.gov.uk, scam texts can be forwarded to 60599 and scam calls can be reported online.

Stay alert

It is important to stay alert and check whether communications from HMRC are genuine.

Where an employee works at home, they may incur additional household expenses as a result, such as additional heating and lighting costs, the cost of business phone calls on a home phone, additional insurance costs and additional cleaning costs.

Reimbursed by the employer

The tax legislation contains a dedicated exemption which allows the employer to reimburse these costs without the employee being taxed on the amount reimbursed.

For the exemption to apply, the employee must be working at home under homeworking arrangements with the employer, rather than out of choice. Further, the costs must be reasonable and must be incurred in carrying out the duties of the employment; the exemption does not apply if the employer meets costs which would be the same regardless of whether the employee worked at home or not, such as mortgage interest or rent.

To make life easier, rather than reimbursing actual costs, which can be tricky and time-consuming to work out, the employer can make a tax-free payment of £6 per week (£26 per month) to cover the additional costs of working from home. The amount is the same whether the employee works at home one day a week or five days a week.

Costs met by the employee

Prior to 6 April 2026, the employee was able to claim a fixed deduction of £6 per week (£26 per month) to cover the additional costs of working at home under a homeworking arrangement. Employees could also claim a deduction based on the actual additional costs of working from home.

However, from 6 April 2026, this all changed. From that date, a deduction for additional household expenses is expressly prohibited regardless of whether they are wholly, exclusively and necessarily incurred in the performance of the duties.

Where a taxpayer has been made bankrupt, their Unique Taxpayer Reference (UTR) expires at the end of the tax year in which they were made bankrupt. They cannot use that UTR to file Self-Assessment tax returns for later tax years. Instead, they must re-register for Self-Assessment and  obtain a new UTR if they continue to trade after the tax year in which they were made bankrupt or if they need to complete a Self-Assessment tax return for any reason after that tax year. The old UTR must be used for all Self-Assessment tax returns filed for the tax year in which the person became bankrupt.

Having different UTRs for pre- and post-bankruptcy enables HMRC to keep the person’s tax affairs for each period separate and ensures that future tax returns are processed correctly.

If the old UTR is used post-bankruptcy, this will lead to delays in processing as HMRC will need to correct the UTR.

When a company pays a dividend, all shareholders holding the same class of shares must receive dividends in proportion to their shareholdings. To pay dividends at different rates, a company must either issue different classes of shares with distinct dividend rights or vary the proportions held by shareholders. Alphabet shares are commonly used to provide such flexibility.

What are alphabet shares?

Alphabet shares are different classes of shares identified by letters, such as ‘A’ ordinary shares and ‘B’ ordinary shares. They allow dividends to be paid to one class of shareholder without requiring equal dividends to all shareholders. This can be particularly useful where shareholders are taxed at different rates, e.g., where one shareholder is a higher-rate taxpayer and another is a basic-rate taxpayer or non-taxpayer.

In addition to differing dividend rights, alphabet shares may allow different voting rights or other restrictions, such as redeemable or non-redeemable rights. However, where shares are intended to qualify for the spouse exemption under the settlements legislation, care should be taken to ensure the shares carry full ordinary share rights and are not substantially restricted. Otherwise, HMRC may argue that the recipient has not acquired true ownership but only a right to receive income and tax dividends on the original shareholder instead. Therefore, shareholders should retain genuine beneficial ownership of their shares, including rights to capital, voting and future growth, rather than holding shares solely to receive dividends.

‘Settlements’ legislation

The settlements legislation is designed to prevent income being diverted from one person to another for tax advantages while the original owner retains effective control or benefit. Dividends paid on certain classes of shares must represent a genuine return on investment rather than effectively being remuneration for services taxed as employment income under PAYE and NIC.

HMRC’s stance

HMRC can now more easily identify who owns shares in which companies through enhanced digital reporting, data matching and Companies House transparency reforms.

In addition, as from 6 April 2025, any person who was a director of a close company during the relevant tax year must include the name and registered number of the close company, the dividend amount received by the taxpayer and the percentage of the share capital owned in their personal self-assessment tax return. The intention of this additional declaration is to enable HMRC to identify cases where a director’s dividend income appears inconsistent with their shareholding as declared to Companies House or where income-shifting arrangements may exist and merit further review.

Family investment companies (FIC)

Alternative structures such as a FIC may be worth considering. A FIC is a private company set up to hold, invest and distribute family wealth.

The typical structure involves parents as both directors and shareholders, retaining voting control through a single share class. Children or grandchildren are allocated different share classes with limited or no voting rights but entitlement to dividends and capital growth. Care must be taken where parents provide funds for the children’s share subscriptions or where the dividend policy is structured to benefit the children at the expense of the parents.

Suggested action

Directors should be wary of creating alphabet shares immediately before declaring a dividend or after substantial reserves have accumulated, as HMRC may view this as evidence of income shifting.

Generally, dividends should be paid into an account beneficially owned by the shareholder concerned. Genuine joint accounts are usually acceptable.

If a future sale of the company is anticipated, shareholders should consider the qualifying conditions for Business Asset Disposal Relief. Any restrictions attached to alphabet shares may affect eligibility.

Practical point

Failure to maintain proper documentation can increase the likelihood of an HMRC challenge. Directors should ensure the articles of association permit the creation of alphabet shares, board minutes and shareholder agreements are in place, and all dividend declarations are properly documented and implemented in accordance with the company’s articles.

Taxpayers within Self-Assessment must make payments on account towards their next tax and Class 4 National Insurance bill if the tax that they owed for the previous tax year was £1,000 or more, unless they paid more than 80% of the tax that they owed for that year outside Self-Assessment, for example, under PAYE. Each payment on account is 50% of the tax and Class 4 National Insurance liability for the previous tax year. The payments must be made by 31 January in the tax year and 31 July after the tax year. If more tax and Class 4 National Insurance is due for the year, the balance must be paid by 31 January after the end of the tax year.

Example

Tom is a self-employed gardener. In 2024/25 he had profits from self-employment of £45,000. He paid tax of £6,486 and Class 4 National Insurance of £1,945.80 – a total bill of £8,431.80.

As his total tax and Class 4 National Insurance bill is more than £1,000, he must make payments on account towards his 2025/26 bill. Each payment on account is £4,215.90 (50% of £8,431.80).

31 July 2026 deadline

The second payment on account for 2025/26 is due by 31 July 2026.

If payment is not made on time or the full amount is not paid by this date, interest will be charged from the due date of 31 July 2026 to the date that the payment is made in full.

Review the payments

As the July payment on account is made after the end of the tax year to which it relates, the profit for that tax year may be known. Where this is the case, the payment on account should be compared to the actual payments which will be due for the year. If taxable income has fallen, for example, because profits are less in 2025/26 than in 2024/25, the payments on account can be reduced.

Example

The facts are as in the example above. In June 2026, Tom does his accounts for 2025/26. During that year, he took some time off to care for his elderly mother. As a result, his profits have fallen and for 2025/26 are £36,000. His tax bill for 2025/26 is £4,686 and his Class 4 National Insurance bill is £1,405.80 – a total of £6,091.80.

If Tom makes two payments on account of £4,215.90, he will overpay by £2,240 Consequently, he reduces his payments on account.

Reducing payments on account

Where a taxpayer knows that their bill will be lower this year than last year, they can ask HMRC to reduce their payments on account. The taxpayer can do this online by signing into their personal tax account, selecting the option to view their Self-Assessment return and selecting the ‘reduce payments on account’ option. An application to reduce payments on account can also be made by post on form SA303.

Example

The facts are as in the above example. Tom opts to reduce each payment on account to £3,045.90 (50% of his 2025/26 liability). He paid £4,215.90 on 31 January 2026. He must therefore pay £1,875.90 by 31 July 2026. The payments on account will match his 2025/26 liability so there will be no balancing payment to make by 31 January 2027 (although the first payment on account for 2026/27 of £3,045.90 will be due by that date).

It is important to note that if the payments on account are reduced by too much, interest will be charged on the shortfall.