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VAT: Partnership can reclaim input tax on its lease


A firm of solicitors was allowed to reclaim input tax even though the lease for its business premises was held by a dormant shell company, and not directly by the trading partnership.

2nd Dec 2022
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In the case of Ashtons Legal (a Partnership) v HMRC [TC08641] HMRC denied input tax recovery because the supply was made to a dormant company set up to protect the name of the firm. The first-tier tribunal (FTT) agreed with Ashtons that the economic reality of the lease arrangements allowed the firm the right to input tax recovery.

The Lease

Ashtons is a firm of solicitors which had been looking for a new business premises for several years. It eventually found suitable base of operations and started negotiations signing Heads of Terms in 2017. However, under the Law of Property Act 1925 (The 1925 Act) a partnership cannot enter into a lease with more than four partners.

Because of this Ashtons decided to insert a dormant shell company known as Ashtons Legal Limited (the company) for the purposes of the lease. In 2019 the company entered into two leases, although the landlord insisted that partners should act as guarantors, and so four partners were duly added as parties to the lease.

Ashtons occupied the premises for the purposes of its legal business.  Although invoices were issued in the name of the company, Ashtons paid them and reclaimed the VAT. There was no sub-lease between the Company and the Ashtons and the Land Registry records the company as holding an interest in the premises. 


Ashtons’ advisors wrote to HMRC in 2020 seeking non-statutory clearance for recovery of the VAT on the charges for the lease, quoting the tribunal case of Lester Aldridge [2004] 18864.

HMRC responded that the company could have registered for VAT and charged under an option to tax to the Ashtons, but Ashtons maintained that this would leave it with the same problem under the 1925 Act. HMRC responded by stating that there was a supply to the company and an ongoing exempt supply to the Ashtons and that they were not entitled to input tax recovery.


HMRC argued simply that the contract was between the landlord and the Company and the Company and the Ashtons. The Ashtons paid the bills but only as guarantor and had no beneficial ownership of the leases which did not give the right to input tax recovery.

The Ashtons said that merely looking at the contract is insufficient, and that the commercial and economic reality should be considered having regard to all the circumstances as per the Supreme Court case of Airtours Holiday Transport Ltd [2016] which itself cited other prominent judgements. The case of Aldridge, which the FTT said mirrored this case, as well as another FTT case which also followed Aldridge, NT Advisors Partnership [2017] UKFTT625 were cited.

FTT’s Approach

The starting point was Airtours which involved payment of invoices for supplies made to third-party creditors, but which also referenced a number of equally prominent cases where the relationship between contracts, bill payers and commercial reality were discussed.

In this case the Ashtons paid the landlord for the provision of leasehold property and, as referenced in Airtours, commercial businesses do not normally pay for supplies unless they are the recipients. However, who pays the bills is not in itself decisive; the substance and reality of the transactions is more critical.

The FTT concluded that the economic and commercial reality was that the Company was a cipher inserted to deal with the problem caused by the 1925 Act, without which the Ashtons could not have entered into the lease. As such, it was entitled to recover the VAT as input tax as it was more than just a guarantor. Instead it paid and received in return use, enjoyment and benefit of the premises for its business.


FTT decisions are not binding on tribunals but in Aldridge there were close similarities in that it involved a firm of solicitors, a nominee company and a lease, and the same problem encountered by the Ashtons in that the 1925 Act put restrictions on how it might enter into a property lease. HMRC never appealed Aldridge, which dates back to 2004 so it is hardly surprising that the FTT came to the same


The courts have often looked at the insertion of associated companies to see if they mask the commercial and economic reality for anti-avoidance purposes but here there was no suggestion of that. Unless HMRC is willing to take this to a higher court perhaps it should address its guidance in respect of input tax recovery specifically in respect of what appears to be an anomaly for partnerships in the relationship between VAT and the 1925 Act.

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