Independent VAT Consultant
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VAT: Pre-incorporation legal fees

The first tier tribunal has ruled that VAT can be claimed on pre-incorporation legal fees. Neil Warren explains why the taxpayer won despite the fact that the legal bills were addressed to the director.

6th Sep 2019
Independent VAT Consultant
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Imagine you had spent nearly two years incurring legal fees and attending court hearings to defend your right to exploit some impressive new software you have designed. You win the case and form a limited company to begin trading, but then HMRC disallows all of the input tax claimed on legal fees on the company’s first VAT return.

I can imagine you would not be happy.

This was the story behind the case of Koolmove Ltd (TC07305). The sole director and shareholder Mr McKee was a software programmer, and in his spare time had developed software which he intended to commercialise via the company.

However, before he could do so a third party brought an action against him seeking to prevent him from attempting to do so. McKee was successful in the subsequent hearings and incorporated shortly after the judgment. He then reclaimed £28,876 on pre-incorporation legal fees.

Pre-incorporation input tax

It is often forgotten that input tax can be claimed on certain expenses incurred before a company is incorporated, as long as a number of conditions are met:

  • the goods or services were supplied to a person who became a director, employee or shareholder once the incorporation had taken place;
  • the company pays for, or undertakes to pay for, the expenses in question (with Koolmove, this was done via the director’s loan account);
  • in the case of services, they were incurred within six months of the VAT registration, a time limit of four years applies to goods;
  • the goods or services have a direct link to future taxable supplies made by the company.

The rules are set out in the VAT Regulations 1995, reg 111.

HMRC’s argument

The invoices from the lawyers were dated between 22 February 2016 and 5 January 2017. The company was incorporated on 8 July 2016 and became VAT registered on 1 August 2016 ie the six-month time window for services was clearly met. But HMRC disallowed input tax on the following grounds:

  • the letter of engagement was between the McKee and the lawyers – therefore, the supply of services was to him as an individual and not the company;
  • the costs were of benefit to McKee and not for the company.


The tribunal noted that if HMRC insisted that invoices and contracts were only ever made out to the VAT-registered business, then no pre-incorporation input tax claim would ever succeed. You can’t have invoices addressed to an entity that didn’t exist at the time! The tribunal commented: “We have found HMRC’s case somewhat confused.”  

The decision

The tribunal agreed that there was no point in McKee forming a company until he had won his case, which was against his former employers. When he was successful, Koolmove Ltd was formed and its future supplies will be linked to the exploitation of the software developed by McKee.

Input tax on pre-incorporation legal fees could, therefore, be claimed and the appeal was allowed.

Pre-registration input tax quirk

In my VAT consultancy work, I find there is a common point of misunderstanding with accountants as far as the pre-registration input tax rules are considered:


Nick bought a computer in April 2017 for £2,000 + VAT. He used it personally for 12 months until he left his job in April 2018 and became self-employed as a bookkeeper, eventually becoming VAT registered in April 2019.

In this situation, Nick cannot claim input tax on the computer, even though it was bought within four years of his VAT registration date and is used by his business because it was not a business expense when it was purchased. To quote from HMRC’s VAT Input Tax manual VIT32000:

“A business may not use regulation 111 to recover VAT on supplies that were purchased for non-business or private purposes. The expense is not a business cost and no VAT can ever be recovered, regardless of any subsequent business use.”

Second victory

The Koolmove case is quite unusual as I can’t recall reading a case before on pre-incorporation input tax issues.

The tribunal’s thinking also reaffirms the outcome of another case about input tax sometimes being claimable on legal fees involving a director, Praesto Consulting UK Ltd, which I discussed in April 2019 in Input tax on personal legal fees.

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