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Is advice about personal tax a business expense?

Adrian Mooy - Wednesday, February 05, 2020
 
The First-tier Tribunal recently ruled on whether a company was entitled to reclaim VAT on fees it paid for advice about a scheme to reduce income tax bills for its directors.

 

Taylor Pearson (Construction) Ltd (TPC) reclaimed VAT of just under £10,000 that it had paid for advice involving complex scheme to remunerate its directors tax efficiently. HMRC argued that the scheme benefited the directors by saving them income tax and as this was a personal and not a business objective the company wasn’t entitled to reclaim the VAT on the fees. TPC’s counter argument was that the scheme had tax and NI advantages for it as well, and therefore it had a business purpose.

 

In case its main argument failed HMRC had a back up which was that there was no “direct and immediate link” between the VAT reclaimed with taxable supplies, i.e. supplies on which TPC would charge VAT. HMRC uses this argument if it objects to VAT being reclaimed but has no other solid legal grounds to refuse it. The “direct and immediate” argument derives from a Supreme Court judgment and so carries significant weight.
 
The judgment also states that VAT on purchases can be reclaimed if there is “...a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” . In other words, VAT paid on a genuine overhead of a business is deductible (unless specifically prohibited as is the case for business entertainment).

 

The First-tier Tribunal’s decision therefore turned on whether the cost of the advice it received was an overhead of TPC’s business or for the personal benefit of the directors. While there was no doubt that the latter was significant, the judge noted that the advice only related to tax and NI matters linked to remuneration from the company and not to the directors’ other income. It was therefore an overhead of the business and TPC was entitled to reclaim the VAT it had paid.
A company isn’t entitled to reclaim VAT paid on fees for advice given in respect of a director’s personal tax or other financial affairs.
 
The judge showed his displeasure with HMRC’s suggestion that incentivising employees by reducing their tax and NI bills on company income had no direct and immediate link with the purposes of its business. He said, “I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward” . Especially as it had relatively recently lost a very similar case which it didn’t appeal against.
 
VAT paid on fees incurred by a company to minimise tax and NI liabilities on remunerating its directors or employees is a legitimate overhead of the business and can therefore be reclaimed.

 

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