Is advice about personal tax a business expense?
The case
Taylor Pearson (Construction) Ltd (TPC) reclaimed VAT of just under £10,000 that it had paid for advice involving a fairly complex scheme to remunerate its directors tax efficiently. HMRC argued that the scheme benefited the directors by saving them income tax and as this was a personal and not a business objective the company wasn’t entitled to reclaim the VAT on the fees. TPC’s counter argument was that the scheme had tax and NI advantages for it as well, and therefore it had a business purpose.
No link between VAT paid and supplies
In case its main argument failed HMRC had a back up which was that there was no “direct and immediate link” between the VAT reclaimed with taxable supplies, i.e. supplies on which TPC would charge VAT. HMRC often uses this argument if it objects to VAT being reclaimed but has no other solid legal grounds to refuse it. The “direct and immediate” argument derives from a Supreme Court judgment and so carries significant weight. However, in our experience HMRC inspectors often misuse or don’t understand the ruling (see The next step ). This case was another example of this.
A less direct link
The judgment also states that VAT on purchases can be reclaimed if there is “...a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” . In other words, VAT paid on a genuine overhead of a business is deductible (unless specifically prohibited as is the case for business entertainment).
Tip. This quote is a useful one to remember and use the next time an overzealous VAT inspector tells you that you aren’t entitled to reclaim VAT because it has no direct and immediate link to the VATable supplies you make.
Personal expense or overhead?
The First-tier Tribunal’s decision therefore turned on whether the cost of the advice it received was an overhead of TPC’s business or for the personal benefit of the directors. While there was no doubt that the latter was significant, the judge noted that the advice only related to tax and NI matters linked to remuneration from the company and not to the directors’ other income. It was therefore an overhead of the business and TPC was entitled to reclaim the VAT it had paid.
Trap. A company isn’t entitled to reclaim VAT paid on fees for advice given in respect of a director’s personal tax or other financial affairs.
HMRC ticked off
The judge showed his displeasure with HMRC’s suggestion that incentivising employees by reducing their tax and NI bills on company income had no direct and immediate link with the purposes of its business. He said, “I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward” . Especially as it had relatively recently lost a very similar case which it didn’t appeal against.
For more information about the Supreme Court judgment, visit http://tipsandadvice-tax.co.uk/download (TX 20.09.07).
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