Budget 2025: No major VAT shocks, but key changes ahead

Budget 2025 may not have delivered any headline grabbing VAT surprises, a relief for many businesses, but several important updates are tucked away in the details. Becky Hayes, VAT partner, highlights the key changes that businesses should be aware of.

Taxi and private hire operators excluded from TOMS

From 2 January 2026, taxi and private hire operators acting as principals will no longer be able to use the Tour Operators’ Margin Scheme (TOMS).

TOMS is a VAT scheme designed for traditional tour operators. It allows businesses to calculate VAT only on their profit margin, rather than the full sale price. Some private hire operators use TOMS to account for VAT on their margin after paying drivers, rather than on the full fare. HMRC disputes this approach, arguing that TOMS is intended for conventional tour operators.

This disagreement has already led to VAT litigation. In December 2023, the First-tier Tribunal ruled that private hire services provided by Bolt Services Ltd could fall within TOMS, a decision later upheld by the Upper Tribunal. HMRC has appealed to the Court of Appeal.

To resolve uncertainty, new legislation will make it clear that private hire and taxi rides are excluded from TOMS, unless they are provided as part of other travel services.

Mandatory e-invoicing for B2B VAT invoices

From April 2029, e-invoicing will become mandatory for all B2B VAT invoices.

E-invoicing allows invoice data to be exchanged digitally between buyers’ and suppliers’ financial systems, even when those systems differ. This automation reduces manual processing, speeds up payments, and improves tax compliance.

The government plans to work closely with businesses, software providers, and other stakeholders, with a full implementation roadmap expected in Budget 2026.

Other key VAT updates

• No VAT on business donations to charities – From 1 April 2026, businesses donating goods to charities will no longer have to account for VAT, even when the value exceeds the current £50 “business gift” threshold. This applies when goods are intended for distribution to people in need or for charitable activities.
• VAT changes for land used in social housing – The government will consult on updating VAT rules to better incentivise development of land intended for social housing.
• Higher late payment VAT penalties – From 1 April 2027, penalties for late VAT payment will increase.
• End of duty relief on low-value imports – By March 2029 at the latest, customs duty relief will be removed for goods worth £135 or less. These imports will become subject to customs duty, with a consultation under way on the new framework.