Input VAT Recovery for Partially Exempt Businesses: Lessons from the Littlewoods v HMRC Tribunal Decision

Januar 19, 2026 Globale Mehrwertsteuer-Updates

A recent UK First-tier Tribunal decision has provided welcome clarity on when input VAT on advertising and marketing costs can be recovered in full, even by partially exempt businesses.

In Littlewoods Ltd v HMRC, ruled upon on 16. December 2025, the Tribunal allowed Littlewoods’ appeal and rejected HMRC’s attempt to restrict input VAT recovery on product photography costs. The decision is highly relevant for businesses that sell taxable goods while also offering insurance or finance options alongside those sales.

Background to the Case

 Littlewoods incurred significant costs producing product-specific photographs used to market goods sold through its retail channels. These images were directly linked to promoting taxable sales of those products.

Alongside its core retail activity, Littlewoods also makes exempt supplies, including insurance and financial products linked to credit or payment arrangements offered to customers to support the purchase of goods.

HMRC argued that, because Littlewoods was partially exempt, the photography costs should be treated as partly attributable to exempt supplies, resulting in restricted input VAT recovery under the partial exemption rules.

Littlewoods disagreed and appealed to the Tribunal.

The Tribunal’s Decision

 The Tribunal found in favour of Littlewoods, concluding that the product photography costs had a direct and immediate link to taxable retail sales, and not to the exempt insurance or finance supplies.

In reaching its decision, the Tribunal accepted that:

  • The purpose of the photography was to promote taxable product sales.
  • The insurance and finance options were ancillary to those sales, rather than the focus of the marketing activity.
  • Any link between the photography costs and exempt supplies was too remote to justify restricting VAT recovery.
  • The costs were not general overheads but were directly attributable to taxable outputs.

As a result, the Tribunal held that the input VAT on the photography costs was recoverable in full.

Why This Case Is Important

 This decision is a timely reminder that partial exemption does not automatically mean restricted input VAT recovery. HMRC often takes a broad view of attribution where exempt supplies exist, but this case confirms that the correct approach is to examine the economic reality of how supplies are actually used.

It reinforces the importance of applying the “direct and immediate link” test correctly, rather than defaulting to conservative or HMRC-led assumptions.

What Should Businesses Do Now?

 Many businesses accept restricted input VAT recovery on marketing and advertising costs without fully analysing whether those costs genuinely relate to exempt supplies. This case demonstrates that such an approach can result in an unnecessary VAT loss.

If your business incurs VAT on advertising, promotional or website campaigns and also makes exempt supplies, it may be worth reviewing whether your VAT recovery position is defensible or overly cautious.

VAT recovery and partial exemption are areas where small technical differences can have significant financial consequences.

Contact our VAT specialists today to discuss how this decision may apply to your business and how we can assist including:

  • a review of your VAT recovery methodology
  • advice on attributing advertising or marketing costs
  • support in challenging HMRC’s position
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