Resources Type: News

The VAT payroll fraud case in brief

On 21 April 2026, a Scottish court case ended with four prison sentences after a long-running VAT payroll fraud that diverted £8,831,124 in tax. Official case material shows the fraud ran from September 2015 to June 2017 and used a network of companies, including Linear Services, to bill clients for payroll services, collect VAT, and then keep that money instead of paying it over. The companies involved generated about £52 million in combined sales. 

The case was not treated as a paperwork error or a technical filing issue. The sentencing statement records deliberate evasion, significant planning, and a serious organised crime aggravation. Official summaries also show that the money was moved through bank accounts to the offenders, associates and family members, then spent on luxury goods, holidays and overseas property plans. 

Scottish VAT Fraud Gang’s Sentences at a glance

The total prison time imposed was more than twenty-two years. 

• Leslie Thompson — found guilty after trial and sentenced to 7 years. 
• Graeme Cullen — found guilty after trial and sentenced to 6 years. 
• Graham Newall — found guilty after trial and sentenced to 5 years and 6 months. 
• Martin Lang — pleaded guilty to an amended charge during the trial and was sentenced to 4 years. 

Key fact	Detail
VAT loss	£8,831,124 was fraudulently evaded.
Period of offending	September 2015 to June 2017.
Business scale	The network collected VAT from clients through about £52 million of combined sales.
Next financial step	Confiscation action is due to follow under proceeds-of-crime powers.

The published sentencing remarks also make clear that the lead sentence was 7 years, which was the maximum available for this offence as committed before 22 February 2024. 

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How the Scottish VAT fraud gang operated

In simple terms, the arrangement worked like this:

• Payroll services were supplied to clients, and invoices included VAT. 
• Over a 21-month period, the VAT was collected but not paid out. 
• The money was then redistributed through bank accounts and used for personal spending rather than tax compliance. 

Official court material lists the spending in striking detail. It included: 

• gold bullion, diamonds
• luxury cars
• clothes 
• expensive watches 
• Holidays
• racing trips and ,
• plans for a high-end overseas property development. 

The sentencing statement describes a scheme built on organisation, planning and sustained dishonesty over a lengthy period. It also records that the money should have gone towards frontline services but was instead used to support private lifestyles. 

What businesses should learn from VAT payroll fraud case

This payroll fraud case matters because it shows how ordinary-looking payroll arrangements can hide serious VAT risk. Employers and agencies should understand exactly what they are buying: labour only, payroll services only, or labour with payroll services. That distinction affects the VAT treatment and helps businesses test whether invoices make commercial and tax sense. 

The core checks are practical:

• Verify the supplier’s VAT registration. 
• Confirm who actually holds the workers’ employment contracts. 
• Ask for evidence of Real Time Information submissions and tax payments. 
• Keep a detailed record of every check completed. 

The red flags businesses should not ignore:

• savings on payroll or labour costs that look too good to be true 
• a payroll company asking an established business to transfer staff into it 
• unusual third-party payment arrangements 
• a supplier with no real office or online presence 
• a payroll company with a name that closely resembles the end business 

There is also a direct VAT consequence for businesses higher up the chain. If workers’ contracts are shifted into a fraudulent company, recovered VAT may be denied, and VAT already reclaimed may need to be repaid. Separate labour-supply-chain guidance adds that links to non-compliant suppliers can create both financial and reputational damage. 

How We Help Businesses Stay VAT Compliant

For businesses that want tighter controls after cases like this, our services focus on:

• VAT reviews for outsourced payroll and labour arrangements
• supply-chain due diligence for agencies, contractors and end clients
• invoice and contract checks to test whether VAT treatment is correct
• support with VAT corrections, disclosures and compliance queries
• practical record-keeping systems that stand up to scrutiny

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Conclusion

This case ended with lengthy prison sentences because the conduct was deliberate, organised and sustained. More than £8.8 million in VAT was dishonestly withheld; the money was used for lavish personal spending, and confiscation action is still to come. For compliant businesses, the takeaway is clear: understand the service being supplied, test the VAT position properly, and document every supplier check before payroll money starts moving. 

FAQs 

How did this fraud actually make money?

It created VAT-charged payroll invoices, collected the VAT, and then held back the tax instead of paying it over. The court record shows that the money was then channelled into personal spending and related accounts. 

Can a business lose the right to reclaim VAT if fraud sits elsewhere in the chain?

Yes. A business can lose input tax recovery on transactions connected with fraud, including cases where it knew or should have known there was a fraud risk. 

What checks matter most before outsourcing payroll?

The essentials are identifying the real supplier, checking VAT registration, confirming who employs the workers, and reviewing evidence that payroll filings and tax payments are being made properly. 

Why does this matter for honest firms?

For labour supply chains and umbrella company abuse, non-compliant operators can undercut compliant businesses, damage reputations and expose workers to tax and rights-related harm. 

Since April 2025, the UK government has abolished the Furnished Holiday Lettings (FHL) tax regime, aligning short-term rental profits with those from other property businesses. However, this change to income tax does not impact VAT on furnished holiday lets in the UK, as these properties remain subject to standard VAT rules. As such, VAT compliance continues to be a crucial consideration for landlords. holiday lettings are standard-rated supplies. When your taxable turnover, including holiday rent and other taxable income, exceeds the £90,000 registration threshold, you must register for VAT and charge 20%. Many landlords unaware of this rule face backdated assessments and penalties, particularly where the furnished holiday lets VAT for landlords in the UK are not properly understood.

Why VAT rules for furnished holiday lets in the UK apply

HMRC broadly defines holiday accommodation to encompass houses, flats, chalets, and even caravans marketed for short stays, forming the basis of VAT rules for furnished holiday lets in the UK. Supplies of such accommodation are standard-rated, and you must account for VAT on all charges regardless of length of stay. In contrast, residential letting is exempt. Because VAT registration is based on turnover across all taxable activities, multiple holiday properties owned by the same person must be aggregated. Splitting ownership across family members may not help: HMRC can issue a direction to treat artificially separated businesses as one if there are financial, economic or organisational links.

Notably, there is no reduced value rule for holiday accommodation. Hotels may reduce the VAT value for long stays after 28 days, but holiday homes remain standard-rated throughout the stay. This catches out landlords who assume that longer bookings reduce VAT liability.

Off‑season exemption

A limited exemption applies when holiday accommodation is let as residential property for more than 28 days during the off‑season. The area must have a clearly seasonal holiday trade, and you must keep evidence, such as tenancy agreements, showing residential use in line with VAT rules for furnished holiday lets in the UK. Letting for longer terms in winter can reduce VAT bills, but the conditions are strict and the property cannot be marketed as holiday accommodation during that period. Cities with year‑round tourism, such as London and Edinburgh, generally do not qualify.

Deposits and cancellations

Another pitfall involves deposits and cancellation fees. HMRC treats deposits as advance payments: VAT is due when the deposit is received. If the guest cancels and the landlord retains the payment, VAT remains due unless you refund the money. Cancellation or retention fees are also taxable. Landlords must therefore set booking terms that reflect the VAT consequence of non‑refundable deposits.

End of the FHL regime – and what it doesn’t change

The FHL rules, introduced in 1984, gave landlords access to beneficial capital allowances, capital gains reliefs and pensionable earnings. Their abolition from April 2025 means profits will be taxed like other property income. However, the VAT treatment of holiday lettings is unchanged. Even after the FHL status disappears, renting a property as holiday accommodation remains a taxable supply unless the strict off‑season exemption applies.

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What landlords should do now

A reactive approach to VAT often leads to errors, penalties, and cash flow pressure. A more structured approach helps reduce risk and keeps reporting clean. Key actions include:

Monitor turnover and register at the right time

Track your taxable turnover on a rolling 12-month basis, not just by tax year. This report should include:

• All income from holiday lets
• Any other taxable business activities

Once you approach the £90,000 threshold, take action early. Late registration can result in:

• Backdated VAT liabilities
• Interest and penalties
• Reduced profit margins if VAT was not factored into pricing

Use off-season letting strategically

Longer winters let can change the VAT position, but only if conditions are met. To apply the exemption:

• The let must exceed 28 consecutive days
• The property must be used as residential accommodation
• The location must have a clearly seasonal holiday market

Keep clear evidence such as tenancy agreements and occupancy records. Without this, HMRC may treat the income as standard-rated.

Get deposits and cancellations right

 Deposits are not just administrative. They carry tax implications:

• VAT is due when the deposit is received
• If the booking is cancelled and the deposit is retained, VAT still applies

To manage these situations: Build VAT into your pricing model

• Build VAT into your pricing model
• Review booking terms to reflect tax treatment
• Keep accurate records of refunds and retained amounts

This avoids underreporting and unexpected VAT bills.

Review how your business is structured

Splitting properties across different names or entities does not automatically reduce VAT exposure. HMRC looks at the substance of the arrangement. Businesses can connect through:

• Shared finances
• Common control
• Integrated operations

they may be treated as a single company under VAT. This means:

• Turnover is combined
• VAT registration may be required earlier
• Past periods can be reviewed

Structure decisions should be based on commercial reality, not just tax outcomes.

A considered approach across these areas can prevent costly corrections later and keep your holiday letting activity compliant and predictable.

How Apex Accountants can help

Landlords often overlook furnished holiday lets’ VAT for landlords in the UK until it becomes costly. Apex Accountants & Tax Advisors provides clear, practical support to help landlords stay compliant and protect profitability.

We can:

• Review your turnover position and confirm when VAT registration is required
• Set up compliant invoicing and digital record-keeping systems aligned with HMRC requirements
• Assess your pricing strategy to account for VAT on bookings, deposits, and cancellations
• Review letting agreements to help you make the most of off-season relief where applicable
• Analyse your ownership structure to reduce the risk of HMRC treating separate entities as a single business
• Support you through the transition following the abolition of FHL reliefs, aligning VAT with your wider tax position

Our focus is on giving you clarity, reducing risk, and helping you make informed decisions.

Contact Apex Accountants today for tailored, practical advice.

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FAQs

Do holiday lets always incur VAT? 

Yes. Holiday accommodation is a standard‑rated supply. You must charge VAT once registered, except for off-season lettings lasting more than 28 days.

What is the VAT registration threshold? 

The threshold is £90,000 of taxable turnover over a rolling 12‑month period.

Can I avoid VAT by using separate companies or family members? 

HMRC can aggregate businesses with financial, economic or organisational links and require a single registration.

Are deposits and cancellation charges taxable? 

Yes. VAT is due when you receive a deposit or cancellation fee unless the money is refunded.

A sticky dispute that went all the way back to tribunal

In late March 2026 the First‑tier Tribunal (Tax Chamber) handed down a decision on the VAT classification for marshmallows, which, while making headlines, carries significant implications for businesses selling food products. After years of appeals and remittances, Innovative Bites Ltd.’s oversized “Mega Marshmallows” do not typically require finger consumption, according to the tribunal’s conclusion. As a result, these giant marshmallows are not “confectionery” for VAT purposes and remain zero‑rated under Schedule 8 of the Value Added Tax Act 1994.

This decision follows a complicated procedural journey. In 2022, the tribunal initially ruled in favour of the taxpayer, holding that the product was not confectionery. HMRC appealed, and the Upper Tribunal upheld the decision. The Court of Appeal intervened in March 2025, finding that the earlier hearings had not addressed a narrow statutory question: whether the product is a “sweetened prepared food that is normally eaten with the fingers”. The appeal judges remitted the case back to a differently constituted First‑tier Tribunal to resolve this factual question.

By spring 2026, the remitted tribunal heard evidence on how consumers typically consume the product. It evaluated four methods of eating the marshmallows:

• Way A: Roasted and eaten from a skewer.
• Way B: Roasted, then removed from the skewer and eaten with fingers.
• Way C: Roasted and sandwiched between biscuits and chocolate to form a s’more.
• Way D: Eaten straight from the bag.

Using a simple inequality, the tribunal concluded:

• Non-finger methods (A and C) were more common than finger-eating methods (B and D).
• As a result, the product is not normally eaten with fingers.

Why the legal definition of VAT classification for marshmallows matters

Under Group 1 of Schedule 8 to the Value Added Tax Act 1994, food “of a kind used for human consumption” is generally zero-rated for VAT unless it falls under the confectionery VAT classification UK. However, certain items are excluded, such as confectionery, which is typically zero-rated VAT for food products. Item 2 specifies that confectionery includes chocolates, sweets, biscuits, and any sweetened prepared food normally eaten with the fingers. The dispute over marshmallows centres on this definition, particularly whether giant marshmallows marketed by Innovative Bites, which are larger and designed for roasting, should be considered confectionery.

Normal-sized marshmallows are widely regarded as confectionery, but the VAT classification for marshmallows becomes more complicated with larger, roasting-sized products. However, Innovative Bites’ giant marshmallows are marketed for roasting and sold in the barbecue section, not with confectionery. HMRC argued that the product, despite its size, should be taxed as sweetened prepared food eaten by hand, thereby falling under confectionery VAT classification UK The business, however, argued that due to its size and use in roasting, it should be classified more like a cooking ingredient. This case highlights the importance of precise VAT classification, as the 20% VAT can significantly impact retailers’ margins, forcing price increases or eroding profits.

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From campfires to case law: the tribunal’s reasoning

During the remitted hearing, the tribunal considered several forms of evidence, including witness testimony, packaging, marketing materials, and the physical characteristics of the product. The tribunal specifically focused on how consumers typically consume the product, evaluating four distinct methods of eating:

• Way A: Roasting on skewers (does not involve fingers).
• Way B: Removing the roasted marshmallow from the skewer to eat it (involves fingers).
• Way C: Roasting and making s’mores (dispute whether this involves fingers).
• Way D: Eating straight from the bag (involves fingers).

The key dispute revolved around Way C, which involves roasting the marshmallow and using it in a s’more. The tribunal held that making a s’more does not qualify as eating the marshmallow with fingers for two reasons:

1. Holding the biscuits, not the marshmallow: The consumer holds the biscuits when preparing the s’more, not the marshmallow itself.
2. Marshmallow becomes an ingredient: Once the marshmallow is incorporated into a s’more, it is considered part of the whole dish, not just the marshmallow alone.

Having addressed the finger-eating methods, the tribunal then evaluated whether the non-finger methods (Ways A and C) were more common than the finger-eating methods (Ways B and D). Evidence showed the following:

• Regular-sized marshmallows are more commonly purchased for snacking, while the larger product is marketed near barbecue items, emphasising roasting.
• The packaging itself reflected this, with roasting and s’mores instructions featured prominently, while the “just snacking” instruction appeared last.

Although the evidence was not perfect, the tribunal followed established case law, which requires them to make decisions based on the available facts rather than defaulting to burden-of-proof arguments. The judges concluded that roasting and s’mores were the predominant methods of consumption, rather than eating with fingers.

Consequently, the tribunal ruled that the product is not normally eaten with the fingers. Coupled with the earlier conclusion that the product is not confectionery in the usual sense, the tribunal allowed the appeal and upheld the zero-rate VAT status for the marshmallows.

Implications for the food and drink industry

This ruling underscores the complexity of the UK’s food VAT regime and shows that classification depends on how consumers interact with a product, not just its ingredients. Businesses developing innovative food products must examine the following:

• Packaging and marketing – Where products are positioned in stores and how they are described can influence judicial findings.
• Size and design – The tribunal inferred that the large size makes roasting more likely and snacking less convenient.
• Consumer behavior— Businesses may need to gather evidence about how customers actually consume their products. Lack of evidence could shift the burden back to the taxpayer.

The decision also highlights the risk of inconsistent outcomes for businesses with zero-rated VAT for food products, which can change based on product use and consumer habits. In March 2025, the Court of Appeal interpreted Note 5 as a conclusive definition: if a product fits the description, it is confectionery, unless applying the definition would be absurd. The Court remitted the case precisely because the original tribunal did not decide whether the product was normally eaten with fingers. Had the remitted tribunal found that finger methods were more common, the product would now be standard‑rated.

Other cases illustrate similar tensions. The Guardian’s report on the earlier proceedings notes that HMRC compared giant marshmallows to cooking chocolate and tiny marshmallows, which are ingredients and zero‑rated, while Innovative Bites argued that roasting changes the product’s texture. 

Practical steps for businesses

Given the stakes, food manufacturers and retailers should:

• Audit product portfolios: 

Ensure that VAT treatment aligns with legislation and case law. Items that could be classed as confectionery should be reviewed, particularly if they are marketed as snacks or include sweet ingredients.

• Document marketing and usage

Maintain evidence of how products are packaged, labelled, and promoted. If products are intended for cooking or roasting, ensure that instructions and images reflect these uses.

• Gather consumer insights

Where HMRC raises an assessment, businesses may need to provide evidence of how consumers actually eat their products. Surveys, sales data and usage studies can support claims that a product is an ingredient rather than a snack.

• Seek professional advice before launching new products

VAT classification can hinge on subtle factors, and early engagement with advisors can prevent costly disputes.

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How Apex Accountants & Tax Advisors can help

Determining whether an unusual food product is “confectionery” requires navigating legislation, case law and HMRC practices. Apex Accountants & Tax Advisors offers specialist VAT services for the food and drink sector. Our team keeps abreast of tribunal decisions and can:

• Review product lines to identify VAT risks and opportunities.
• Advise on packaging and marketing so that the presentation of products supports the intended VAT treatment.
• Prepare documentation and evidence to defend VAT positions during HMRC enquiries or appeals.
• Provide training for finance and marketing teams on the implications of VAT legislation and recent cases.

If your business is developing or importing food products with novel characteristics, a proactive VAT review can prevent expensive surprises. Contact Apex Accountants today for a free consultation on how we can support your VAT compliance and planning.

Frequently asked questions

Are giant marshmallows standard-rated or zero-rated for VAT?

The remitted First-tier Tribunal concluded that Mega Marshmallows are not normally eaten with the fingers, so they do not meet the definition of “confectionery” in Note 5 and remain zero-rated. However, HMRC may still appeal, so businesses should monitor developments.

What does Note 5 to Schedule 8 of the Value Added Tax Act 1994 say?

Note 5 states that “confectionery” includes chocolates, sweets and biscuits, certain preserved fruits, and any item of sweetened prepared food normally eaten with the fingers. This inclusive definition means that if a product fits the description, it will generally be standard‑rated.

How did the tribunal decide that roasting and s’mores consumption were more common?

Evidence showed that the product is marketed for roasting and located in supermarket barbecue and world‑food aisles. The tribunal also noted that typical consumers buy normal marshmallows for snacking. On this basis, eating from skewers and in s’mores was deemed more frequent than eating straight from the bag.

Does size affect VAT classification of marshmallows?

Yes. The product’s large size made it impractical for snacking and more suitable for roasting. The tribunal inferred that consumers would not usually eat oversized marshmallows straight from the pack, differentiating them from smaller marshmallows, which are treated as confectionery.

Can HMRC appeal the 2026 tribunal decision?

HMRC has the right to seek permission to appeal within 56 days of the decision. The Edinburgh Chamber of Commerce’s commentary notes that HMRC might argue that the taxpayer did not provide enough evidence about consumer behaviour. Businesses should therefore continue to monitor for further appeals.

What steps should businesses take when uncertain about VAT classification?

Consider seeking advice from VAT specialists, reviewing how products are marketed and consumed, and preparing evidence to support your position. Early engagement with professional advisors like Apex Accountants can reduce the risk of assessments and penalties.