Tax update September 2026
The latest tax developments and VAT round-up for the month.
Our monthly tax update covers the developments most likely to affect individuals, trusts, estates and businesses. If you would like to discuss anything here in more detail, please get in touch with your usual contact.
1. Private client
1.1 Entrepreneurs’ relief allowed despite rental income during a redevelopment
The FTT has allowed entrepreneurs’ relief (now business asset disposal relief) on the sale of a holding company whose subsidiary was letting out a site it was preparing to redevelop.
The subsidiary owned an industrial and business complex that it planned to redevelop for housing. HMRC accepted that it was preparing to trade as a property developer. However, HMRC argued that continuing to let the site to tenants was a substantial non-trading activity, which would take the group outside the definition of a trading group.
The FTT disagreed. Most of the company’s effort in the year before the sale went into the development, which went on to produce over £25 million of profit. The longer-term lettings were being wound down, and the short-term lets helped cover costs and business rates without obstructing the project. Taken in the round, the non-trading activity was not substantial, so the relief was available.
The case is a reminder that the “substantial extent” test looks at activities as a whole, not just income ratios. Good records of how directors spend their time can be decisive.
Pontin & Ors v HMRC [2026] UKFTT 1166 (TC)
caselaw.nationalarchives.gov.uk/ukftt/tc/2026/1166
1.2 Capital reduction taxed as income under the transactions in securities rules
The Upper Tribunal has confirmed that a 2015 return of capital following a share-for-share exchange was caught by the transactions in securities (TiS) rules, so the shareholders were taxed on it as income.
The shareholders had inserted a new holding company, creating a large share premium, and then reduced that capital to return cash to themselves. They reported the receipts as capital gains. HMRC issued counteraction notices. The taxpayers argued that a return of capital fell outside the rules as they stood at the time.
The UT dismissed the appeal, agreeing with the FTT’s conclusion, though for partly different reasons. It also rejected HMRC’s argument that the legislation contained a drafting error that should be corrected. Anyone planning to extract value through a capital reduction should consider the TiS rules, and the clearance procedure, at the outset.
Executors of Paul Hunt & Ors v HMRC [2026] UKUT 342 (TCC)
1.3 Inheritance tax on pensions: HMRC’s second technical note
HMRC has published further detail on how unused pension funds will be brought into inheritance tax (IHT) from 6 April 2027.
The new note covers the information that pension scheme administrators and personal representatives will need to share, the initial assessment of IHT, and when a full IHT account is needed. It also covers withholding of benefits, a Pensions Direct Payment Scheme for paying the tax, the income tax treatment of death benefits, and clearance. Draft withholding and payment notices are annexed.
Personal representatives will carry significant new responsibilities. Clients with large pension funds should review their wills, nominations and wider estate plans before the change takes effect.
HMRC: Technical note 2, IHT and pensions
2. PAYE and employment
2.1 HMRC warns employers about two payroll fraud models
HMRC has issued fraud warnings about schemes marketed to employers and recruitment agencies that claim to cut PAYE costs or settle tax debts.
The first model involves providers that say they can offset employers’ PAYE and NIC using “tax credits” held by companies they have acquired, sometimes businesses heading into administration. In practice the tax is often simply not paid over. The second involves promoters offering to settle HMRC debts with Bills of Exchange. HMRC does not accept these, and it says claims that the arrangements get around the umbrella company rules introduced in April 2026 are untrue.
Businesses using either model remain liable for the unpaid tax, plus interest and penalties. Any client who has been approached, or thinks they may already be in such an arrangement, should take advice promptly about making a disclosure.
2.2 New guidelines for short-term business visitors
HMRC has published Guidelines for Compliance (GfC19) on the income tax, NIC and PAYE treatment of overseas employees who come to the UK for short periods.
The guidelines set out common errors HMRC sees, the records employers should keep and how to correct mistakes. Groups that regularly bring overseas staff to the UK should check their short-term business visitor arrangements against the new guidance.
2.3 Voluntary NICs for periods abroad
From 2026/27, voluntary Class 2 NICs can no longer be paid for periods abroad, and Class 3 for periods abroad needs at least ten years’ UK residence or contributions.
HMRC wrote to affected individuals in July and August. Employers that pay voluntary contributions for staff overseas should review the position. Contributions for years before 2026/27 can still be bought under the existing rules.
HMRC Employer Bulletin, August 2026
3. Business tax
3.1 Care home’s Covid-19 R&D claim rejected
The FTT has rejected an £880,000 enhanced R&D claim by a care home operator for the way it managed Covid-19 across its homes.
The claim covered PPE, testing, visitor restrictions, grouping residents and enhanced cleaning, which the company said formed an integrated system developed in the face of scientific and system uncertainty. The tribunal accepted that the project was structured and that system uncertainty can, in principle, qualify. It also accepted that a project need not produce new scientific knowledge to qualify.
However, the company was applying existing public health knowledge to its own operations, not seeking an advance in science or technology. The tribunal also gave weight to the lack of evidence from a suitably qualified competent professional. Meeting a difficult operational challenge, however well, is not of itself R&D.
Tanglewood Care Services Ltd v HMRC [2026] UKFTT 1137 (TC)
caselaw.nationalarchives.gov.uk/ukftt/tc/2026/1137
3.2 Offshore developer taxable in the UK without a permanent establishment
The Upper Tribunal has held that an Isle of Man company’s profits from developing and selling UK land could be taxed in the UK under the UK–Isle of Man double tax agreement, even though it had no UK permanent establishment.
The company argued that its trading profits were business profits, taxable only in the Isle of Man. The tribunal held instead that they were “income derived from immovable property” under Article 6. That wording is not limited to rents and similar income from using land. It extends to profits from owning, developing and selling it. Non-resident developers should not rely on the absence of a UK permanent establishment, and existing treaty analyses may need revisiting.
Knights Developments Ltd v HMRC [2026] UKUT 329 (TCC)
caselaw.nationalarchives.gov.uk/ukut/tcc/2026/329
3.3 Tax adviser registration: when groups and joint ventures need not register
HMRC has published guidance on when mandatory tax adviser registration does not apply to tax work inside groups, joint ventures, partnerships and investment structures.
The principle is that registration is aimed at genuine third-party advisory relationships. HMRC gives examples where registration is not needed. These include in-house teams advising joint ventures, even those they do not control, partners handling a partnership’s tax affairs, and post-sale transitional support for a business that has been sold. Fund managers’ tax teams serving fund and investee entities are also covered.
The guidance is transitional until specific exemptions are added to the Finance Act 2026 legislation. HMRC says that organisations relying on it in good faith will be treated as compliant and will not be penalised, even if it later turns out they should have registered. Advisers in regulated firms have until 1 April 2027 to register.
4. VAT and indirect taxes
4.1 Director personally liable for £1.78 million of VAT penalties
The FTT has upheld a personal liability notice making a director pay penalties for his company’s deliberate VAT errors, even though an accountant prepared and filed the returns.
The company under-declared around £3.5 million of VAT over more than four years. The tribunal found the director ran the business and was closely involved in its finances. Given the size and consistency of the errors, it did not accept that he could have been unaware of them, so the deliberate inaccuracies were attributable to him.
Relying on an accountant is not a defence where a director controls the business and its finances. Directors should review VAT returns before they are submitted and ask about any figures they do not understand.
Gill v HMRC [2026] UKFTT 1164 (TC)
4.2 Input VAT recovered on a hypercar bought for hire
The FTT has allowed a luxury car hire company to recover input VAT on a hypercar, because the test is the business’s intention when it buys the car, not how the car is later used.
HMRC pointed to few completed hires, gaps in mileage and insurance records and signs of private enjoyment. The tribunal gave more weight to the evidence at the time of purchase. The company already ran a genuine hire business, had customer interest lined up, arranged hire insurance and advertised the car for hire from the start. Low use was explained by Covid restrictions, mechanical problems and an accident.
Businesses buying cars for hire, leasing or driving tuition should keep evidence of their commercial intention from the outset.
Luxurico Ltd v HMRC [2026] UKFTT 1252 (TC)
4.3 Carpet retailer not liable for VAT on fitters’ charges
The FTT has held that a flooring retailer did not have to account for VAT on fitting fees that customers paid directly to independent fitters.
The fitters supplied their services to the customers as principals. They were not subcontractors supplying the retailer. The decision will interest any business that introduces customers to independent tradespeople, such as kitchen, bathroom or furniture retailers. The contracts, invoicing and payment flows need to support who is supplying whom.
Tapi Carpets Ltd v HMRC (TC09975)
4.4 VAT assessment fails when HMRC cannot show its workings
The FTT has found that a trader was not liable to register for VAT after HMRC was unable to produce the workings behind its assessments.
HMRC took more than five years to respond to a request for its calculations, then admitted it did not have them. Nor could it explain how it had reached its figures. On the evidence, the tribunal found that the taxpayer had not been liable to register. Where HMRC raises best-judgement assessments, it is always worth asking for the detailed workings.
Shahid Hussain v HMRC (TC09992)
5. Key dates
The Autumn Budget will be on Wednesday 28 October 2026, and household electricity in Great Britain becomes zero-rated for VAT from 1 October.
| Date | Deadline or event |
|---|---|
| 22 September | PAYE and NIC electronic payments for the month to 5 September must clear |
| 30 September | Accounts due at Companies House for private companies with 31 December 2025 year ends |
| 1 October | Corporation tax due for 31 December 2025 year ends (non-large companies) |
| 1 October | Temporary zero rate of VAT on domestic electricity in Great Britain begins, until 31 March 2027 |
| 5 October | Register for Self Assessment for 2025/26 if newly chargeable |
| 6 October | Further £300 penalty for outstanding 2025/26 employment-related securities returns |
| 12 October | HMRC consultation on NIC recovery time limits closes |
| 28 October | Autumn Budget and OBR forecast |
| 31 October | Paper 2025/26 Self Assessment returns due |
6. And finally
6.1 A tax you could see from the street
Long before electricity bills, Parliament found a simpler way to tax homes: count the windows. The window tax was introduced in 1696, on the basis that bigger houses had more windows and their owners could afford to pay more. Householders responded by bricking windows up, and you can still spot the blocked-in openings on many Georgian buildings.
The tax was blamed for dark, badly ventilated housing and was finally repealed in 1851. It remains a useful reminder that people change their behaviour when taxes change.That is worth bearing in mind as speculation builds ahead of next month’s Budget