Neil Warren considers the key issues in the case of NT Advisors Partnership, which claimed input VAT on barrister fees linked to tax avoidance schemes.
Imagine the following situation: OldCo sells its business as a going concern to NewCo, but at the time of the transfer a number of suppliers to OldCo haven’t got round to raising tax invoices for services they supply on a continuous basis to OldCo. A tax point for VAT purposes hasn’t been created by either an invoice being raised or by payment for the work being made to the supplier.
When the suppliers raise invoices after the business sale has taken place, they should invoice NewCo rather than OldCo, as NewCo has taken on the entire business of OldCo. In this situation can NewCo claim input tax on those fees, even though most of the work was performed when the trade was carried on by OldCo?
The above situation of a trade transfer was the underlying position in the first-tier tribunal case of NT Advisors Partnership (TC06061), which took over the business of NT Advisors 2009 LLP in March 2015. I will refer to these organisations as “LLP” and “Partnership” for the rest of this article.
The input tax in question related to the fees of three barristers who supplied services linked to tax avoidance schemes promoted by the LLP, where the only output tax would be a success fee from clients if the schemes were successful. As the chances of success were “remote” (as admitted in the purchase agreement between the LLP and Partnership), there was unlikely to be an output linked to the input tax claim of £34,775 on the Partnership’s July 2015 VAT return.
HMRC’s visiting officer initially took the view that input tax could not be claimed because the invoices were all addressed to the LLP rather than to the Partnership. This issue was corrected by reviewing the terms of transfer of the business.
However, the HMRC officer then claimed that the expenses did not relate to any taxable supplies made by the Partnership. This is strange because if the scheme(s) had produced a success for the Partnership, and therefore a large fee, then HMRC would certainly have expected output tax on the receipt of the money!
The final HMRC decision was confirmed in a review in July 2016, reaffirming input tax disallowance for the Partnership because the claim “failed to meet the specific conditions for input tax that the supply was made to it” ie it was made to the LLP.
As a further twist to the tale, the LLP had a VAT liability of over £1m owed to HMRC, so an input tax claim by this business would not have produced any VAT cash flow from HMRC, as was the case with a repayment VAT return submitted by the new Partnership.
The tribunal placed a lot of emphasis on the business model of the NT group as a whole and the fact that “success fees may never be paid, and the efforts of counsel will be in vain because tribunals and courts may disagree with their arguments”.
It also noted that if there had been no transfer of the business from the LLP to the Partnership and the LLP had carried on trading, then input tax would be claimable by the LLP under the normal rules of VAT.
There were no exempt supplies being made by the LLP so the business had a right of recovery as all supplies or potential supplies were taxable. The right of recovery extended to the new owners (the Partnership) who took over existing contracts from the sellers.
The NT Partnership won its appeal and was permitted to claim the input tax.
Conclusion - Sveda case
The CJEU case of Sveda (C-126/14) was mentioned in the tribunal report, which related to the costs of a path in a public park that made it easier for customers to get to the café operated by Sveda.
The tax authorities disallowed the input tax claimed by the company because there was no direct link between the cost of the path and sales made by the cafe. The Court disagreed and said that the expenditure related to a “taxable economic activity” of Sveda and therefore input tax could be claimed.
The NT case and the Sveda case are both worth quoting if any of your clients have disputes with HMRC about input tax recovery on overheads.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.