A recent Tribunal case involving a legal partnership provides caution about how the transactional nature of VAT can lead to problems when structuring agreements in the commercial world.
There is a basic premise that VAT incurred on purchases is only recoverable to the extent that it is used in the making of taxable supplies by a taxable person. Documentary evidence in the name of the person recovering is required to support that recovery. As significant amounts can be at stake, there is a great deal of case law surrounding all the points above, particularly around who the beneficiary of the supply is, and is there evidence to support it?
In the case of Ashtons Legal (a partnership), HM Revenue & Customs (HMRC) disallowed input tax incurred on a property lease entered into for the benefit of the partnership, but which was held by an associated company. The company (which was dormant with no trade or assets) was inserted to circumvent the limitations imposed by the Law of Property Act 1925, which means that a lease can only be entered into in the name of four partners.
Following an earlier decision (Lester Aldridge v CCE VAT Decision 18864), the Tribunal found in favour of Ashtons and allowed input tax recovery, but both cases are very fact dependent and even the slightest variance in fact pattern may result in a different outcome. Despite HMRC being aware of the Lester Aldridge case, HMRC took Ashtons to Tribunal to argue the point. This will have resulted in Ashtons incurring time and other professional costs to defend their position.
The above case highlights that it is important to consider VAT when structuring business arrangements and agreements. Also, it shows that HMRC will dispute arrangements more than once at a First Tier Tax Tribunal as decisions from this are not binding. Therefore, advice should be sought at an early stage of a dispute or restructuring.