Budget 2025: VAT

Sugar tax expansion

With an expansion to the sugar tax, to include pre-packaged milk-based drinks, including milkshakes taking effect from January 2028. The tax threshold will be reduced from 5 grams to 4.5 grams of sugar per 100ml, applying to drinks with added sugar, flavoured milks, sweetened yogurt drinks, chocolate milk drinks and ready to drink coffee, such as lattes.

The measure is being introduced to tackle obesity, particularly amongst children.

Manufacturers will need to review ingredients and reduce sugars where possible; expected health benefits and reduced NHS pressure.

VAT relief on business donations

The Chancellor has announced a new VAT relief for donations of goods to certain charitable organisations made by businesses. Generally, the relief will apply to goods valued up to £100 per item, with a carve out for electrical goods up to £200 per item (e.g., laptops, mobile phones, white goods).

VAT Grouping rule change

The UK will revert back to the “whole establishment” approach for VAT grouping purposes, meaning services between a UK head office and an overseas branch can be disregarded for VAT purposes.

Electric Vehicle Duty (eVED)

Tax on EV vehicles via a pay-per-mile system is believed to be introduced from 2028 following consultation. Pure EVs charged at 3p per mile; plug-in hybrids at 1.5p per mile.

Customs Duty on low-value parcels

The low value parcel limit of £135 for customs duty on imports is to be removed by March 2029.

Taxi tax

An introduction of 20% VAT on private hire fares is to come into effect from 2nd January 2026. Legislation will also exclude supplies from the Tour Operators Margin Scheme.

Gambling Duties

Remote Gaming Duty increased from 21% to 40% from April 2026; new General Betting Duty of 25% for remote betting from April 2027; Bingo Duty abolished from April 2027.

Mandatory e-Invoicing

Mandating e-invoicing for all business-to-business invoices from April 2029.

Plastic packaging tax

The Budget includes significant updates to the Plastic Packaging Tax (PPT), which applies to plastic packaging containing less than 30% recycled content. Here are the key updates:

Rate Increase: The PPT rate will increase from £223.69 per tonne to £228.82 per tonne starting from 1st April 2026. This increase is in line with the Consumer Price Index (CPI) and will apply to plastic packaging manufactured in and imported into the UK.

• Mass Balance Approach: The government will allow businesses to use a Mass Balance Approach (MBA) to attribute chemically recycled plastic for PPT compliance, effective from 1st April 2027. This approach will help businesses account for chemically recycled plastic content under PPT compliance.
• Removal of Pre-Consumer Plastic: Pre-consumer waste will no longer be accepted as a source of recycled plastic for PPT purposes, effective from 1st April 2027. This change will close a loophole that previously gave some businesses an unfair competitive advantage.
• Mandatory Certification: A consultation is being launched in early 2026 to seek views on the potential introduction of mandatory certification for businesses claiming relief from PPT based on their plastic packaging containing at least 30% mechanically recycled plastic.

These updates reflect the government’s commitment to aligning the PPT with inflation and continuing its environmental objectives. The industry is hopeful that these changes will stimulate demand for recycled resin and support the UK’s recycling infrastructure and circular economy.

VAT and Insurance Premium Tax (IPT) changes

The Budget 2025 announced by Chancellor Rachel Reeves did not increase the rate of IPT as part of the budget announcement. However, it was confirmed that Motability schemes will be brought into the scope of IPT from summer 2026, with an expected tax raise of £1.065 billion over the next five financial years, reaching a maximum of £305 million in 2030-31. Despite this increase, the OBR now expects IPT income to be around £400 million lower over the five years from 2025-26 to 2029-30 than it predicted in the spring.

VAT refunds of VAT for Combined County Authorities

The Budget includes significant changes to VAT refunds for Combined County Authorities. Starting from 1st December 2025, these authorities will be eligible for VAT refunds under section 33 of the VAT Act 1994, which previously required individual Treasury Orders for each establishment. This change will streamline the process and allow Combined County Authorities to reclaim VAT on purchases and imports made to support their statutory non-business activities.

The measure aims to align the VAT refund scope for Combined County Authorities with that of other local authorities, ensuring they can benefit from VAT refunds in line with their statutory responsibilities.