Proposed changes to VAT126 claims

Budget 2026

The Government announced at Budget 2026 that it intends to introduce legislation concerning VAT126 claims, potentially providing greater legislative clarity around HMRC’s administration of the regime.

VAT126 provides a mechanism through which certain bodies that are not VAT registered can recover eligible VAT incurred on their activities. The announcement is therefore particularly relevant to organisations including local authorities, specified museums and galleries, academy schools and certain charities and other specified bodies.

What has been announced?

The Government confirmed that legislation will be introduced in Finance Bill 2026-27 to enable the future introduction of powers and safeguards for VAT126 claims.

The proposals include a new power for HMRC to assess amounts refunded under VAT126 and a new right of appeal against HMRC decisions.

This is significant because it has the potential to put aspects of HMRC’s administration of VAT126 claims on a clearer legislative footing, while also introducing corresponding safeguards for organisations making claims.

What does this mean for academy trusts?

For academy trusts, VAT126 remains an important mechanism for recovering VAT incurred on their non-business activities.

There is no immediate change to the way academy trusts submit VAT126 claims as a result of the Budget announcement. Instead, the announcement establishes the basis on which more detailed rules may be introduced in the future.

The detail will therefore be important. In particular, academy trusts should monitor the development of the legislation and any subsequent secondary legislation to understand how HMRC’s proposed powers, including the ability to assess amounts previously refunded, will operate in practice and what corresponding appeal rights will be available.

In the meantime, trusts should continue to ensure that VAT126 claims are prepared on a robust basis and that appropriate records are retained to support the VAT being recovered.

A welcome move towards greater certainty?

The proposals could provide greater certainty for bodies using the VAT126 regime, particularly by establishing a clearer legislative framework around HMRC’s powers and taxpayers’ safeguards.

However, much will depend on the detailed legislation. The Budget announcement establishes the legislative framework rather than setting out all of the rules that will ultimately apply.

We will therefore be monitoring the Finance Bill 2026-27 and any subsequent secondary legislation to understand the practical implications for academy trusts and other organisations making VAT126 claims.

Emma Ryan, Tax Manager, Price Bailey

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