Welcome to the May 2026 edition of Tax E-News. We hope you find this useful and informative. As always, if anything is relevant to you or you’d like to explore any of the topics further, please do get in touch.

Making Tax Digital for Income Tax is now live

Making Tax Digital (MTD) for Income Tax is now live and changing how over 860,000 people report their income to HMRC*. Most self-employed individuals and landlords with turnover above £50,000 in 2024/25 were brought into the regime from 6 April 2026.

Under MTD for Income Tax, individuals are required to keep digital records and submit updates to HMRC on a quarterly basis using compatible software. This represents a shift towards maintaining records in-year, rather than dealing with everything after the year end. For those already within the regime, the deadline for the first quarterly update in 2026/27 is 7 August 2026.

While MTD remains optional for many at present, the next group will be brought in soon. If your qualifying income (turnover before expenses) from self-employment and/or property exceeds £30,000 in the 2025/26 tax year, you will be required to comply with MTD for Income Tax from 6 April 2027.

It’s important to note that this does not mean paying tax four times a year, but it does mean more regular reporting. With the right preparation, including selecting suitable software and understanding the requirements, the transition can be managed smoothly while giving you greater visibility over your tax position.

If you think this may apply to you from April 2027, please speak to us – we’d be happy to support you.

Loans to participators (company shareholders)

When a close company makes a loan to a participator (typically a shareholder), and the loan is not repaid within the same accounting period, a corporation tax charge can arise. This is commonly referred to as a ‘Section 455’ or ‘s.455’ charge.

For loans advanced on or after 6 April 2026, the rate of this charge has increased to 35.75% (previously 33.75%).

Where a loan is repaid, released, or written off within nine months of the end of the accounting period, relief from the s.455 charge can be claimed through the corporation tax return.

Relief cannot be claimed for anticipated future repayments. It is therefore important that participators ensure any outstanding loans are repaid before the company tax return is submitted. If repayments are made after submission, please let us know so we can amend the return and claim the appropriate relief.

Another bite of the marshmallow

In 2025, the Court of Appeal referred the case of Innovative Bites Ltd v HMRC back to the First-tier Tribunal (FTT) to determine whether ‘Mega Marshmallows’ qualify as “sweetened prepared food which is normally eaten with the fingers”.

Under VAT legislation, food is generally zero-rated, but this excludes “confectionery”, defined as “any item of sweetened prepared food which is normally eaten with the fingers”.

‘Mega Marshmallows’, which are approximately 5cm in diameter, are primarily intended for roasting and use in ‘s’mores’. In its March 2026 decision, the FTT concluded that the product is more often consumed using non-finger methods than by hand. As a result, mega marshmallows are not treated as standard-rated confectionery and can be zero-rated for VAT.

This means that, currently, only standard-sized marshmallows are subject to VAT at 20%. Mini marshmallows, when sold as a baking ingredient, are also zero-rated, alongside their larger counterparts.

This case highlights the complexity of VAT. If you are unsure about the correct VAT treatment for your products or services, we would recommend seeking advice.

What qualifies for capital allowances?

In Orsted West of Duddon Sands (UK) Limited & Ors v HMRC, the Supreme Court considered whether significant pre-construction costs could qualify for capital allowances. The case related to offshore wind projects, where substantial expenditure was incurred on environmental surveys, seabed studies and technical investigations before construction began.

The companies argued that these costs were integral to creating bespoke assets and should therefore qualify for tax relief. HMRC disagreed, and the Supreme Court ultimately upheld HMRC’s position.

The decision focused on the statutory requirement that capital allowances are only available for expenditure incurred “on the provision of plant or machinery”. The Court determined that this requires a direct link to the physical asset itself. While the surveys were necessary to inform the construction of the windfarms, they were considered preparatory rather than part of the provision of the plant.

Although this case relates to offshore wind projects, the implications are much broader. Many businesses incur significant upfront costs such as feasibility studies, design work, professional fees or regulatory assessments. Following this decision, such costs are less likely to qualify for capital allowances unless they are closely connected to the acquisition or installation of the asset.

When planning major investments, it is important not to assume that all upfront costs will attract tax relief. Careful cost allocation at an early stage can help avoid unexpected tax outcomes.

April 2026 changes to the Construction Industry Scheme (CIS)

As announced in the Autumn Budget 2025, several changes to the Construction Industry Scheme took effect from 6 April 2026.

From this date, contractors are required to either:

• Submit a CIS return each month, including nil returns where no subcontractors have been used; or
• Notify HMRC in advance of inactivity by submitting an inactivity request

With the reintroduction of the nil return requirement, HMRC has also reinstated the full late filing penalty regime. Late CIS returns will incur a £100 fixed penalty, with additional penalties as follows:

• £200 after two months
• A tax-geared penalty at six months (minimum £300 or 5% of the liability)
• A further tax-geared penalty at 12 months (dependent on the reason for the delay)

In cases where a business makes or receives a payment it knew, or should have known, was connected to fraud, HMRC now has enhanced powers. These include the immediate removal of Gross Payment Status (GPS), assessment of lost tax, and penalties of up to 30%.

Where GPS is withdrawn under these rules, the reapplication period has increased from one year to five years.

Stamp Duty Land Tax (SDLT): What is ‘mixed use’?

When purchasing property in England, Stamp Duty Land Tax (SDLT) can represent a significant cost. A key distinction is whether the property is classified as residential or mixed use.

Mixed use properties include both residential and non-residential elements (for example, a house with farmland or commercial buildings) and are subject to lower SDLT rates.

While this classification can be advantageous, it is an area closely scrutinised by HMRC. This was highlighted in HMRC v Christopher Brzezicki [2026] UKUT 00125. In this case, a property including a house, fishing stream and island was initially treated as mixed use by the First-tier Tribunal. However, the Upper Tribunal overturned this decision, concluding that the entire property was residential.

The reasoning was that the stream and island formed part of the property’s “grounds” rather than being genuinely non-residential land. Although the stream naturally bred trout, it was not operated commercially at the time of purchase.

This case demonstrates that unusual features or additional land will not automatically qualify a property as mixed use. The key consideration is how the land is used and whether it forms part of the residential property in practical terms.

Before relying on mixed use SDLT treatment, it is important to seek advice. We would be happy to support you in this area.

 
DIARY OF MAIN TAX EVENTS

MAY / JUNE 2026

Content accurate as of 01.05.26

*Making Tax Digital for Income Tax business population statistics