Independent VAT Consultant
Columnist
Share this content

Accountants shocked by input VAT horror show

Neil Warren reports on a tribunal case where an accountancy firm challenged HMRC input tax assessments for more than £63,000.

20th Apr 2021
Independent VAT Consultant
Columnist
Share this content
input VAT horror show
iStock_Eyes Terrified_GeorgePeters

Imagine that your business has incurred legal fees and the invoice from the solicitor has just arrived, saying simply: “Legal fees as agreed - £73,333 + £14,667 VAT”. Can you claim input tax on this invoice?

The starting point is to consider the legislation about what must be included on a valid tax invoice – as listed in Reg 14, VAT Regulations 1995. The list is extensive – and para (g) states that it must include “a description sufficient to identify the goods or services supplied.”

In the case of Knightsbridge Accountants Ltd (TC8026), HMRC decided that the above description was insufficient to prove that the fees related to the business and taxable activities of KAL. The officer raised an assessment using her best judgment to disallow input tax of £14,667. The tribunal agreed with HMRC.

Property purchase

The invoice for legal fees was the side show in this fascinating case. HMRC also disallowed input tax of £44,000 on the purchase of a property for £240,000 plus VAT that KAL used for its taxable business as a firm of accountants.

The invoice was made out to KAL and the seller had charged VAT because it had opted to tax the property. And accountancy is a fully taxable business, with no input tax restrictions for partial exemption. So, what is the problem, you might ask? The answer is “a big one” - read on

Property owned by a separate company

The property was not owned by KAL. It was owned by a separate company, Knightsbridge Holdings Ltd (KHL). This was confirmed by a land registry search. HMRC also confirmed that the accounts filed at Companies House for KAL did not show any fixed asset additions in the year ended 31 August 2017 – the property was purchased in April 2017.

HMRC therefore disallowed input tax on the basis that there had been no supply of goods to KAL – only to KHL, and the latter was not registered for VAT. The fact that the invoice was made out to KAL was irrelevant.

Taxpayer arguments

The taxpayer’s argument was that KAL had a beneficial interest in the property and was therefore entitled to claim input tax on the purchase price. The holding company arrangement was apparently insisted on by the bank as a condition of the mortgage. These arguments were irrelevant and the appeal failed – a business can’t claim input tax on goods it does not own.

Alternative structure

It is disappointing that the directors did not structure the VAT arrangements differently, which would have saved £44,000:

  • KHL registers for VAT and makes an option to tax election on the building – form VAT1614A is submitted to HMRC
  • It receives a tax invoice correctly made out to the company when the building is purchased and claims input tax on its first VAT return
  • It charges a commercial rent to KAL plus VAT as a result of the option to tax election
  • There are no anti-avoidance issues with associated business rules because KAL is a fully taxable business and the purchase price is less than the capital goods scheme threshold of £250,000, which is when anti-avoidance issues are relevant.

Register for free to continue reading

It’s 100% free and provides unlimited access to the latest accounting news, advice and insight every day. As well as access to this exclusive article, you can:

View all AccountingWEB content
Comment on articles
Watch our digital shows and more

Access content now

Already have an account?

Replies (9)

Please login or register to join the discussion.

avatar
By GR
20th Apr 2021 20:29

Another great article Neil. Thanks for including your opinion about one option the accountancy firm could have used to structure the transaction more VAT efficiently. It just goes to show, if you have a big VAT purchase, call Neil first!

Thanks (4)
avatar
By paulwakefield1
21st Apr 2021 09:01

Interesting article.

Regarding the legal fees, if the invoice had said "...as per letter of engagement dated xx xxx xxxx", would that have been sufficient? (Assuming said letter of engagement existed of course!).

Thanks (1)
David Ross
By davidross
21st Apr 2021 09:56

The lesson is, Knightsbridge Accountants should have known better

Thanks (4)
avatar
By petestar1969
21st Apr 2021 10:20

Check out the accounts these guys filed for themselves for 31 August 2019.

A director was appointed on 20 August 2018 but not named on the 31 August 2019 accounts.

The accounts were apparently approved on 4 June 2017.

No employees either.

The business has a negative P&L.

I worry about their clients.

Thanks (2)
avatar
By NewACA
21st Apr 2021 10:36

Its obvious what happened, and why the lawyers put "fees as agreed" on the invoice. One just has to have their "commercial hat" on.

1. The accountant messed up the transaction and realised they couldn't claim the VAT on the lawyers invoice after the fact;

2. The accountant directed the lawyer to write the invoice with the words "fees as agreed" on the invoice, to hide the fact the VAT was in fact for work on a different entity, in the hope it wouldn't automatically be flagged as disallowable if investigated.

Thanks (2)
Profile
By indomitable
21st Apr 2021 10:44

Interesting and great article, certainly a lesson for us all about invoicing. The accountants should have know better regarding the VAT on the property purchase though, seems to me a basic mistake

Thanks (1)
avatar
By moneymanager
21st Apr 2021 13:03

Tax planning anyone?

Thanks (0)
avatar
By Justin Bryant
21st Apr 2021 17:47

Yes, but I doubt there would be a problem with such invoice wording if the correct company has been invoiced.

It's a bit like where HMRC have discretion to allow input VAT recovery with alternative evidence of a supply to a VAT invoice – HMRC tend to refuse to exercise their discretion where there is doubt that such a supply actually took place.

Thanks (0)
RLI
By lionofludesch
22nd Apr 2021 17:59

Hard to be sympathetic.

Well, too hard for me anyway.

Thanks (0)