Hello and welcome once again to the Pinsent Masons podcast, where we keep you up to date with the most important developments in global business law every second Tuesday. I'm Matthew Magee and I'm a journalist here at Pinsent Masons. And this week we hear about how the UK government is pursuing large companies over the VAT gap and we learn what new EU guidelines on being transparent about AI use will mean for companies developing and using the technology. But first, here's some business law news from around the world.
UK Russian oil sanctions extended with jet fuel and diesel carve out,
UK limits judicial review challenges on big energy and infrastructure projects and
Netherlands tightens rules on non EU alternative investment funds.

New UK trade sanctions on Russia have carve outs for jet fuel and diesel, but businesses involved in importing the fuel still need to be alert to risks, an expert has said. The UK government updated UK Russia sanctions regulations to extend restrictions to certain oil products that are derived from Russian crude oil but processed in other countries. The provision of certain services related to these imports is also prohibited. The UK has decided to enable the import into the UK of diesel and jet fuel that is derived from Russian crude oil but processed in other countries. The change has been widely reported as an easing of existing restrictions on Russian oil. But sanctions specialist Stacy Keen said the opposite is true and that the licence is a carve out to new restrictions imposed by the UK government.

Plans by the UK government to limit the challenges available to nationally significant infrastructure projects have been welcomed by experts. The plans will allow some clean energy projects to be approved by Parliament and restrict the scope of judicial review on big infrastructure projects. Under the proposal, essential clean energy ventures would be designated as being of critical national importance, which would limit exposure to judicial review on all but human rights grounds. Other nationally significant infrastructure projects, including new transport and water schemes, would have a new fixed legal challenge window. Infrastructure expert Robbie Owen said the move would help meet the UK's green energy and security goals, but that more could be done to protect projects from challenge. Owens called for Parliament to have a role in relation to approving critically important national infrastructure projects when the bill for the Planning and Infrastructure Act 2025 was being considered to shield those projects from judicial reviews.

Non EU alternative investment fund managers face stricter conditions to market funds in the Netherlands following a regulatory update from the Dutch Authority for the Financial Markets. The changes come from ongoing implementation of the EU's Revised Alternative Fund Managers Directive. The update includes tightened rules on which non EU alternative investment fund managers can market their funds in the Netherlands. Under the new rules, those seeking to market alternative investment funds in the Netherlands must not be established in jurisdictions that are classified as high risk third countries under the EU anti money laundering rules or be included on the EU's list of non cooperative jurisdictions for tax purposes.

In the UK you pay a sales tax on most things you buy. It's called value added tax or VAT and it's 20% just now for most things. Like any other tax, it's a policy lever as well as a revenue generation tool. So some things don't attract the tax if they're things that the government wants to encourage or support, such as children's shoes, books or groceries. And like any tax, it's a bit more complicated than that. Some things have a VAT rate of 5%, not 20%, and if the tax isn't due, that might be because it's zero rated or because it's exempt altogether, a difference we thankfully don't have to dwell on today. The outcome of all of this is that it's complicated and businesses often have to do a lot of judging for themselves what VAT they owe, which means finding the balance between avoiding tax that shouldn't be due but risking investigation and paying up and gaining stability. We at Pinsent Masons knew that HMRC was focusing on the gap between what it expected large and medium companies to pay and what it was actually receiving, so we used Freedom of Information laws to get a bit more detail and what we found was pretty surprising. HMRC has thrown resources at investigating this VAT gap between expected and actual income and has come up trumps. Its activity resulting in the payment of £5.3 billion of unpaid VAT in the year to April 2025. London based VAT expert Bryn Reynolds told me what his team found.

Bryn Reynolds: So HMRC as part of the UK government are spending an increasing amount of time from what we can tell on VAT investigations and in particular those into large and medium sized businesses. We think that HMRC have identified that there's a substantial increase in the VAT gap for those businesses. And when I say the VAT gap, I mean the difference between the VAT that technically should be paid and what HMRC can see has actually been paid. So we wanted to understand how many investigations had been launched in the year ending 31 March 2025. So we wanted to understand the numbers there in terms of the number of investigations that had been launched because that gives an idea about where the government's focus and priorities are. And we can see that over the last year the number of investigations increased from 9,071 the previous year up to 11,894. That is a significant increase. It means it's increased by 31% year on year. And that means an awful lot more large and medium sized businesses will be actively facing VAT investigations from HMRC to check whether they've paid the correct amount of VAT.

Matthew Magee: Bryn said that HMRC's analysis was that there was lots of tax going unpaid by these companies, the VAT gap, and that it was proved right because investigations resulted in the payment of lots of tax and HMRC is taking the view that lots of this is to do with companies pushing at the boundaries of VAT rules rather than mistakes.

Bryn: Well, the calculation underlying VAT gap is very complex and it obviously involves a degree of estimation in terms of what HMRC thinks should be paid. But obviously that's not entirely incorrect because they are finding quite a large amount when they're doing these investigations. In terms of what contributes to that from a VAT perspective, they've split it up roughly in terms of 85% of that is what they consider to be either an incorrect legal interpretation of VAT rules or pushing the boundaries of what VAT rules mean. When they're looking at the tax under consideration, which is VAT, they think might have been underpaid, 85% of it they think is due to businesses taking, for lack of a better word, an aggressive approach to where the boundaries are for VAT. The other 15% of that, the remainder they've attributed towards just simple errors and that can be absolutely anything from just picking the incorrect VAT rate when you're deciding what the VAT of supply should be, transposition error, could be any of a whole range of different errors ranging from very minor to more serious.

Matthew: As I've outlined, working out what VAT you have to pay isn't always easy, and there's no doubt that it's more complex for some industries than others, meaning there's a greater opportunity for pushing an adventurous line on what you owe, but also for innocent mistakes.

Bryn: In terms of particular sectors, there's obviously going to be higher risk sectors than others. Some businesses are inherently not particularly complex from a VAT perspective. Some are very complex, but there's no particular defining characteristic. It tends to be those where there are specific VAT exemptions and around how those VAT exemptions are applied and when you're looking at those, quite a lot of financial services firms are going to fall into that, anyone dealing with education. We're seeing an awful lot in the education space at the moment because the supply of education can be exempt from VAT. And of course, you'll be aware that a large number of food companies and those retailing food are struggling with the very complex rules on VAT as it applies to food.

Matthew: There is an anomaly contained within these findings and it's this. Bryn's experience is that most larger companies are conservative when it comes to VAT, preferring an approach that gives years and years of stability over one that skirts close to the line for the advantage of a lower bill. But he says this hardly squares with the finding by HMRC that 85% of the tax recovered is as a result of companies operating at the edges of interpretation.

Bryn: I was surprised to see how little was focused on errors and how much on legal interpretation and pushing boundaries because in my experience, most businesses these days are not wanting to particularly push the boundaries on legal interpretation, certainly in large companies. What companies want to know is that what they're doing will be accepted by HMRC and that HMRC will be in agreement. There is some appetite for legal challenges where people genuinely think HMRC have got the position wrong, but for the most part large companies just want to be that compliant and for when they have a VAT officer to come through, it's all agreed it's low risk and they want to move on. I think there's a fundamental disagreement. I think in terms of the statistics, it doesn't quite work that way in terms of it's 85% of the tax under consideration rather than necessarily 85% of the cases. So it could just be a couple of affected sectors having an overly large impact. But there is clearly a very significant discrepancy between businesses which have adopted an approach where HMRC thinks there's a significant amount of potential tax under consideration that they need to investigate and work out whether VAT is correctly due and those businesses that have reported to HMRC that they think that there is a difference between their interpretation and HMRC's. And clearly there is a gap between those two figures that doesn't make an awful lot of sense other than businesses not being fully aware of HMRC's position or duty not to report it. And judging by the level of yield that HMRC takes from each of these investigations, the average yield it receives, which I think we've got it down as £8.6 million, there clearly is a very significant discrepancy and that's why HMRC are investing further in this area.

Matthew: Bryn's team has looked at the figures in detail and found that HMRC's increased investigative activity is more than paying for itself in terms of recovered tax income. So companies can be sure of one thing. More will follow. So his message is when it comes to VAT, be sure of your ground.

Bryn: In terms of large companies, with the number of investigations that are currently ongoing, roughly one third of the 2,000 businesses in HMRC's large business unit are being investigated. So that suggests that the majority of businesses are at some point going to face a VAT investigation if a third of them have them ongoing at any one point. So I think you need to now have an awfully strong grip on what your VAT position is across all of your main supplies. So we all know that VAT hangs on the nuances in some scenarios. So you need to be very comfortable that the treatments you've applied and how they've been applied and how you're identifying errors. Where you have a position which HMRC might continue to be aggressive, you need to receive professional tax advice, in my view, as to whether that position is correct and be able to then substantially defend that against HMRC and also properly considered the uncertain tax treatment notification provisions and whether you need to tell HMRC about it.

In a world of deepfakes, spurious news, and machine generated music and art, knowing when something is AI and when it's human is becoming crucially important. And the European Union agrees, which is why its AI laws demand that companies tell users when they're using AI. But what exactly does that mean? The European Commission has provided some clarity on that, but first Frankfurt based AI expert Nils Rauer told me why the transparency is legally required at all by the EU AI Act.

Nils Rauer: We do have a risk staggered approach within the EU AI Act, so you have high risk and then risk levels that are below high risk AI systems. Now when we talk about transparency obligations set out in Article 50 of the EU AI Act in first place, it's important to note that this cuts across all risk levels. So if an AI system is within the scope of the EU AI Act, there are certain obligations that apply to those AI systems. And the underlying idea is that if a human being is directly interacting with an AI tool, this human person should be made aware of the fact that we are not in the situation where two human beings have a dialogue. But you're talking to AI. That's one example of the transparency. Again then we all know there are deep fakes and other means how AI can either create or manipulate content in the same way. If you as a human being are confronted with that type of content, you should know it comes from AI. So that's the type of transparency that Article 50 wants to achieve.

Matthew: So if the law already says transparency is needed, why the guidelines? Well it's because it will be a long time before there are court cases to pour over every word of the law to provide the right kind of hard clarity that companies need. The guidance is a stand in and while courts might overrule it in the future, they do often follow EU Commission guidance.

Nils: As with all new legislation, all new pieces of law, they come with the language that the legislator has agreed upon and some recitals that give some steer on how those articles should be interpreted. What it is lacking at this early stage in the life cycle of a law is any type of decision handed down by an authority and notably also any type of court ruling. We have several years until a dispute reaches the stage of the European Court of Justice in Luxembourg, so you can expect first decisions only being handed down in four, five, six years time. And therefore we have the obligation and the right of the EU Commission to provide upfront guidelines, guidance’s that express how the Commission would read, would interpret, would apply a certain article or paragraph. It is important to understand that courts might occasionally take a pivot to a different direction. Still, providers and deployers will find it helpful as like a recipe how to put in a disclaimer or whether or not you have to identify certain AI generated content as generated by AI. Or is it so obvious in that context that you just can skip that type of disclosure which is also set in the guidelines? So it is very helpful for providers and deployers.
If you follow the guidelines by the European Commission, it is at least very likely that you will not be seen as acting in negligence, for instance, because you have done whatever you could and that is maybe that the courts say well in future you need to do differently. But as you follow that guidance, you did not act in negligence and of course not in wilful conduct. So yeah, that is helpful. It brings down the risk of being held liable.

Matthew: So what then does the guidance actually clarify? What do companies know now that they did not before? Well, there is lots there, but one crucial point is about notifications, says Nils.

Nils: It is a 40 page document and they have a number of key expressions which they are defining from their perspective and this is both on what is in the scope and therefore needs to be compliant with the transparency obligations and at the same time they also give us steering guidance on what are the exemptions set out in Article 50. Everyone who is deploying an AI tool that needs to make disclaimer to disclose certain information will ask himself or herself, how do I do that? And therefore we do have examples. What is an adequate textual disclosure? What is an adequate auditory disclosure or what is an adequate visual or graphical disclosure? That is a very good guideline for all those who in practice need to disclose. Hey, now you are talking to AI.

Matthew: So who does the law apply to? The short answer is everyone. And that means not just the people deploying user facing systems, but in some circumstances the people building the large language models and other models deep at the core of artificial intelligence itself.

Nils: It is very clear in the guidelines what type of obligation sits with a provider of an AI system, what obligations sit on the side of a deployer of an AI system and they even went one step beyond that and said there might be occasions where the transparency, that the technical transparency obligations, should already be implemented at the model level and as Article 50 in general is applying to AI systems, this document makes clear that as it may be appropriate even at the earlier stage, at the level of the building of the AI model, you could think about and you should think about implementing those technical measures that allow for disclosing the information and to comply with Article 50.

Well, thank you again for listening, sharing, reviewing. Please do let colleagues, friends and acquaintances know if this is something that you think you might be interested in. And please do listen again next time as we survey the world of business law. Remember, you do not need to wait to hear from me every two weeks.
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The Pinsent Masons Podcast was produced and presented by Matthew Magee for international law firm Pinsent Masons.