The Commissioners for HMRC v Hotel La Tour Ltd
[2023] UKUT 178 (TCC)
Visual Investments International Limited v The Commissioners for HMRC
19 September 2024
[2024] UKFTT 843 (TC)
First-tier Tribunal
A company tried to deduct VAT on legal fees from its taxes. The tax authorities said the fees weren't directly related to the company's main business. The court agreed, saying the main goal of the legal battle was to get valuable shares, not to do the company's everyday work. Even though the company hoped to do more business after winning, this wasn't enough to qualify for the deduction.
Key Facts
- •Visual Investments International Limited (Visual) appealed five VAT assessments issued by HMRC.
- •The assessments disallowed input tax deductions for legal fees paid to Withers LLP relating to a shareholder dispute.
- •HMRC argued the legal fees lacked a direct and immediate link to Visual's taxable supplies (management consultancy).
- •Visual contended the fees were directly linked to its taxable supplies and that it was the sole recipient of the legal services.
- •The dispute involved Visual, its subsidiary BIG, and Mr. Kenneth Burgess (director of Visual).
- •The litigation aimed to enforce an oral agreement for the transfer of shares, primarily benefiting Visual.
- •Visual's management consultancy services were temporarily suspended during litigation and were not actively conducted during the relevant periods.
Legal Principles
For input tax deduction, there must be a direct and immediate link to the taxpayer's taxable supplies.
BLP Group PLC v Customs and Excise Commissioners [1996] 1 WLR 174
A direct and immediate link exists if the acquired goods and services are part of the cost components of the taxable transactions that utilize them.
Frank A Smart & Son Ltd v HMRC [2019] UKSC 39
The question of a direct and immediate link is objectively ascertained from the facts, not subjective intentions.
Royal Opera House Covent Garden Foundation v Revenue and Customs Commissioners [2021] EWCA Civ 910
A 'but for' test is insufficient to establish a direct and immediate link; neither is a 'close economic link' or a 'necessary economic link' sufficient.
Sofology Limited v HMRC [2022] UKFTT 0153 (TC)
The right to deduct VAT does not apply to tax due solely because it's mentioned on the invoice.
Genius Holding BV v Staatssecretaris van Financiën (Case 342/87)
The burden of proof lies on the appellant (Visual) to demonstrate entitlement to input tax deduction on the balance of probabilities.
This case's findings
Outcomes
Appeal dismissed.
The legal fees lacked a direct and immediate link to Visual's taxable supplies of management consultancy. The primary purpose of the litigation was to secure valuable shares, not to directly further management consultancy services. While Visual may have intended to resume such services after the litigation, this future intention was not a direct and immediate link to the legal costs. Furthermore, Visual was not the sole recipient of the legal services; Withers LLP represented multiple parties.
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