VAT CASES - 09.04.2020

Input tax could be claimed on fees for directors’ tax advice

The case. A construction company (TP) engaged two different tax firms to advise it on how to pay bonuses to three directors in the most tax-efficient manner in 2012 and 2013. HMRC disallowed input tax of £9,970 claimed by the company on the basis that the expense was to reward the directors in their personal capacity, so it was not a business expense relevant to the company.

The law. Input tax can only be claimed on an expense if it is for the “purpose” of the business and is also linked to taxable rather than exempt, private or non-business activities. It is not sufficient for an expense to have a “benefit” for the business, it must be incurred for a business purpose. The challenge is to always ask the question: what is the reason for this expenditure? It is sometimes useful to retain evidence of the business purpose if HMRC might challenge an input tax claim in the future.

The decision. The court ruled in favour of the taxpayer for two reasons: the proposed scheme produced a 13.8% saving on Class 1A NI payments, so had a direct impact on the company’s bottom line profit; it also rewarded company employees. As the Tribunal report noted: “reward and incentivisation of employees is one of the more obvious overheads of the business that is treated as a cost component of the company’s overall economic activities.” The appeal was allowed.

Key points.The judge was very critical of HMRC for bringing this case to the tribunal because it was materially identical to a 2017 case involving director payments. Although a case heard in the First-tier Tribunal is not legally binding and only affects the parties involved in the case, the judge described the earlier case as “highly persuasive”. If your business incurs overhead expenses and claims input tax that is subsequently challenged by HMRC, this is a good case to quote in support of your claim. The challenge is to be able to show the business purpose of any expense, which the taxpayer did in this case.