VAT CASES - 27.08.2020

Legal fees had no business link, so VAT reclaim was denied

The case. HMRC issued personal liability notices (PLNs) against the taxpayer (PM) in respect of civil evasion, and dishonest behaviour penalties relevant to two overseas companies that he was allegedly involved with as a shadow director.

The companies failed to register and pay VAT on imported goods subject to excise duty. The penalties exceeded £34 million and a freezing injunction was in place on his personal assets for £22.75 million. The disputed issue was whether input tax could be claimed by PM’s VAT-registered sole trader business (a property-owning entity) in respect of legal fees incurred between March and November 2017.

The law. Input tax can be claimed on an expense that is for the “purpose” of a VAT-registered business. This test involves consideration of why the expense was incurred; it is not sufficient for an expense to give a “benefit” to the business, the purpose test must be fully met. A commonly cited example is a builder who joins a private golf club and picks up new customers as a result of conversations with fellow members. There is a business benefit, but the purpose of the membership is to allow the builder to play golf.

The decision. PM’s representative claimed that the property business could not operate properly if his assets were frozen because of the injunction. HMRC claimed that the expenditure had no link to his VAT-registered business because the purpose of the fees was to establish that the overseas companies were not his business and he was therefore not subject to any PLNs. The tribunal supported HMRC and dismissed the appeal.

Key points.The issue of input tax and legal fees was given a high-profile in 2019 following the victory ofPraesto Consulting UK Ltdin the Court of Appeal. This case related to input tax incurred by the company defending civil proceedings brought against its director where there was an adverse trading impact on the company if the decision went against him. You must consider each input tax claim on its merits to ensure the business purpose test is met.