Independent VAT Consultant
Share this content

HMRC fails to score with replayed facts

HMRC received a yellow card from the tribunal because the case concerning input tax on tax advice was nearly identical in facts to a case it lost three years ago.

14th Jan 2020
Independent VAT Consultant
Share this content
Yellow card

The facts in the Taylor Pearson (Construction) Ltd case (TC07464) were very straightforward: the company engaged two separate tax advisers to advise them on how to pay bonuses to three directors in the most tax-efficient manner in 2012 and 2013.

HMRC claimed the purpose of the expense was to reward the directors in their personal capacity, so the disputed input tax of £9,970 was not a business expense and not linked to the company’s taxable activities. 

The decision

The tribunal’s thinking was very simple – the purpose of the expense was clearly relevant to the company for two reasons:

  • The proposed scheme produced a 13.8% saving on the bonuses, in the form Class 1A NIC;
  • It rewarded the company’s employees: “reward and incentivisation of employees is one of the more obvious overheads of the business that is treated as a cost component of the company’s overall economic activities”.

The appeal was allowed.

Déjà vu

As I read through the case report I thought: this is the same issue as the Doran Bros case only this one was tax advice about share incentives for directors, rather than advice about incentives linked to buying gold.

Judge Gillett also shared my thoughts:

“Of more concern to me is that this case is materially identical to the relatively recent case of Doran Bros which was decided in favour of the appellant.”

He added: “HMRC did not appeal Doran Bros, although HMRC suggested that I should not read too much into that.” He supported the findings of Judge Bailey in Doran in his own verdict, referring to it as “highly persuasive,” concluding that: “Not surprisingly therefore I come to the same decision.”

Practical approach

The decisions reached by the first tier tribunal are only binding on the parties involved in the case, ie HMRC and the taxpayer. However, the decisions should not be under-estimated. I always recommend that FTT decisions are referred to in letters sent to HMRC disputing a particular issue, because they are given high importance by officers dealing with specific queries or by visiting officers following a compliance review.

The judge’s thoughts in a case report are much more powerful to an HMRC officer than, say, an argument put forward by a taxpayer seeking a VAT gain. Keep quoting the cases, even though HMRC might try to turn a blind eye to the ones they lose!

Second yellow card

To rub salt into HMRC’s wounds, it got another telling off from the judge – in footballing terms, this means two yellow cards and a sending off by the referee!

The judge was very critical of HMRC’s view that expenses for rewarding employees cannot have any direct link to taxable supplies made by a business: “I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward. This concerns me.”


This case was a bad day at the office for HMRC, and the lesson in my mind is very clear: just because HMRC might not like the outcome of an expense (a controversial tax saving scheme), that does not mean it can ignore its objective or purpose (to reward employees).

Replies (2)

Please login or register to join the discussion.

By Justin Bryant
15th Jan 2020 10:15

A High Court judge recently took it upon himself to recharacterize an EBT bonus as a distribution to the company's shareholders (although he failed to recharacterize it for tax purposes). I think he was wrong to do that in that case, but it just goes to show that if it's not your money at risk you can turn up at court and chance your arm hoping for the best (with a dud judge - of which there are many) with no downside as HMRC did in this case.

Thanks (0)
Replying to Justin Bryant:
By whitevanman
15th Jan 2020 16:05

Is that the same ebt case where the judge didn't consider CGT or whether the directors had paid road tax or any other completely irrelevant matter? What a dud!!
The judge in the case referred to by the OP was obviously someone who would attract your favour. Despite recognising that FTT decisions are of no binding authority, (s)he criticises HMRC for recognising the fact but then not constraining themselves and feeling bound by it. Just hope the judge doesn't get one of my cases. I like the ones who know what the law is and apply it rather than those who talk drivel.

Thanks (0)