May 2026 Tax News

Making Tax Digital (MTD) for Income Tax is now live – most self-employed individuals and landlords with turnover above £50,000 in 2024/25 were mandated into the regime from 6 April 2026. Under MTD for Income Tax, individuals will keep digital records and send updates to HMRC every quarter using compatible software. This will require in-year record keeping, rather than everything being dealt with after the year ends. For those already mandated, the deadline for the first quarterly update in 2026/27 is 7 August 2026. While MTD is currently optional for many taxpayers, the next cohort of individuals will be mandated soon. If your qualifying income (turnover before expenses are deducted) from self‑employment and/or property was over **£30,000 in the 2025/26 tax year**, you will be required to follow MTD for Income Tax from **6 April 2027**. This change does not mean paying tax four times a year, but it does mean reporting more regularly. With time to prepare, choosing the right software and understanding what’s required can make the transition smoother and help you stay in control of your tax affairs. Please talk to us if you think you’re likely to be mandated from April 2027 – we’d be happy to help!

When a close company makes a loan to a participator (in most cases, this means a company’s shareholder), and it is not repaid in the same accounting period, a corporation tax charge can arise. This is sometimes referred to as a ‘Section 455’ or ‘s.455’ charge. For loans advanced on or after 6 April 2026, the percentage charged increased to 35.75% (previously, this was 33.75%). Where a loan to a participator is repaid, released, or written off within nine months of the end of the accounting period, relief from the s.455 tax charge can be claimed in the corporation tax return. It is not possible to claim relief for anticipated future loan repayments. This means that company participators should take care to repay any outstanding participator loans before their company tax return is submitted. If repayments are made after a return has been submitted, let us know, so that an amended corporation tax return can be completed, and relief claimed, as appropriate. 

In 2025, the Court of Appeal sent the case of Innovative Bites Ltd v HMRC to the First-tier Tribunal (FTT), telling them to determine whether ‘Mega Marshmallows’ are a “sweetened prepared food which is normally eaten with the fingers”. The VAT legislation zero‑rates food, but this excludes “confectionery”. Confectionery is defined as “any item of sweetened prepared food which is normally eaten with the fingers”. “Mega Marshmallows” are approximately 5cm in diameter and are primarily intended for roasting over fires and being used to make ‘s’mores’. In their March 2026 ruling, the FTT found that the product was more frequently eaten by non‑finger methods than by with-finger methods. Mega-marshmallows are therefore not standard-rated confectionery items and can be zero-rated for VAT. This means that currently, only standard-sized marshmallows are subject to VAT at 20%. Mini marshmallows, when held out for sale as a baking ingredient, are zero-rated along with their mega-sized counterparts! This case demonstrates how complicated VAT can be - if you have any doubt about the VAT rate you should be applying to your products and services, please do get in touch.

In Orsted West of Duddon Sands (UK) Limited & Ors v HMRC, the Supreme Court considered whether major pre‑construction costs could qualify for tax relief as capital allowances. The case arose from offshore wind projects where the companies spent significant amounts on environmental surveys, seabed studies and technical investigations before any turbines were built. The companies argued that these costs were an essential part of creating bespoke assets and should therefore attract tax relief. HMRC disagreed, and the Supreme Court ultimately sided with HMRC. The Court’s decision turned on a single statutory phrase: capital allowances are only available for expenditure incurred **“on the provision of plant or machinery.”** The judges held that this wording requires a close and direct link to the physical asset itself. While the surveys were necessary to decide _whether_ and _how_ to build the windfarms, they were seen as preparatory. They put Orsted in a position to construct plant, but they were not part of providing the plant itself. Although this case involved offshore windfarms, the lesson is far broader. Many businesses incur substantial costs before buying or building long‑term assets: feasibility studies, design work, professional fees or regulatory assessments. After this decision, those costs are less likely to qualify for capital allowances unless they are tightly bound to the actual acquisition or installation of the asset. When planning major investments, don’t assume all upfront project costs will attract tax relief. Map costs carefully as they arise and separate genuinely asset‑related spending from earlier feasibility or exploratory work. Getting that distinction right early can avoid unpleasant tax surprises later.