Recovering VAT on expenditure

Recent decisions of the Courts have highlighted how there is much more to the question ‘Can I recover this VAT?’ than merely being in possession of a VAT invoice from the supplier.

Broadly speaking, entitlement to recover VAT as input tax can depend on a range of different factors, including:

• Is it a business expense, and not private expenditure?
• Is the VAT incurred attributable to making an onward taxable supply?
• Is VAT recovery specifically blocked by law? Common examples include the purchase of a car, and business entertainment costs. 
• Is the VAT being incurred by the true recipient of the supply? Just because a person pays an invoice it doesn’t automatically give them a right to recover the VAT.
• And of course, the ‘invoice question’ is always there – is there acceptable evidence of the VAT that is being claimed? This normally means the claimant needs to hold a valid VAT invoice from the supplier.  

Attribution of expenditure to taxable supplies

On 21 May 2024 the Court of Appeal (CA) released its judgment in the latest chapter of the litigation concerning Hotel La Tour Limited (HLT).  The CA decision represents a vindication for HMRC and an endorsement of HMRC’s long-standing approach to deny VAT recovery when a business makes an exempt supply – in this instance a sale of shares. 

The issue

The sale of existing shares is an exempt supply.  Until the HLT case it had been generally accepted that where costs are incurred in making a share sale, the VAT incurred is attributable to the exempt supply of shares meaning the VAT is not recoverable – there is a direct and immediate link between the costs incurred and the onward exempt supply. 

Downstream taxable supplies

HLT was in a VAT group with several subsidiaries that operated hotels.  HLT decided to sell off one subsidiary to raise funds it would put towards the cost of developing a new hotel in a different location.  HMRC disallowed VAT of £76,823 that HLT had claimed on professional fees relating to the sale of the subsidiary’s shares on the grounds the VAT directly related to an exempt supply. 

However, HLT argued the shares were sold for the clear purpose of raising funds to invest in developing a new hotel, and hence the VAT incurred had a direct and immediate link to the ‘downstream’ taxable supplies that would follow once the new hotel was operational. 

Both the First Tier Tribunal and the Upper Tribunal agreed with HLT and rejected HMRC’s arguments.  The Tribunal noted the position would be different if the professional fees represented a cost component of the share price, and these costs were met out of the proceeds; however, on the evidence this was not the case as the shares were sold at their market value.  In fact, pricing shares in a company on a ‘cost-plus’ basis seems highly unlikely – shares are normally priced, for example, with reference to a multiple of earnings or net asset value.  The Tribunals considered the sale of shares in the subsidiary did not break the link to taxable supplies. 

Direct and immediate link

HMRC made a further appeal, to the CA, which has now judged there was a direct and immediate link between the costs incurred and the exempt share sale, and the Tribunals had been wrong in law to ignore this.  The VAT incurred on professional fees was exempt input tax and therefore not recoverable, irrespective of the ultimate intended use of the funds raised by the share sale.  The CA considered the fact HLT and its subsidiary were in the same VAT group did not change the analysis. 

Previously, the Tribunals had looked towards recent European Court of Justice cases which, it was argued, were at odds with HMRC’s long-standing reliance on cases such as BLP plc on direct and immediate link.  However, the CA considered the Tribunals had stretched a point too far and it was incorrect to disregard the link between the costs incurred and the exempt share sale.  HMRC’s long-established position has therefore been upheld by the CA. 

A valid VAT invoice?

The recent First Tier Tribunal decision in Fount Construction Limited v. HMRC addresses a different condition for VAT recovery, namely whether the claimant held a valid VAT invoice.

The VAT Regulations specify that a tax invoice must include “...a description sufficient to identify the goods or services supplied...”  In this case, HMRC challenged the taxpayer’s recovery of VAT at 20% on several invoices from a supplier that showed a description of “building works at the above” with the building site address in question in a box entitled “job address.”

The Tribunal held that the statutory purpose of the invoice description is twofold, namely:

• To enable both recipient and supplier to have a common understanding of the services to which the invoice relates;
• To provide HMRC with a means of understanding the essential nature of the supply and a basis for seeking more information as needed.

The Tribunal did not agree with HMRC’s proposition that the invoice description needed to be in such detail as to enable HMRC to draw definitive views from the invoice alone, observing that HMRC have wide-ranging powers to request additional information, and also to refuse input tax recovery if that information is not provided. 

In the words of the Tribunal “...the invoice is the gateway into any enquiries by HMRC, rather than a repository for the answers to any questions that might be asked.” 

This case acts as a reminder to taxpayers of the importance of obtaining a valid VAT invoice, whilst also suggesting the approach taken by HMRC needs to be reasonable.  Anecdotally, it seems in recent months HMRC have been more frequently making challenges to VAT recovery on the grounds of inadequate descriptions on tax invoices.  In a refreshingly succinct decision, the Tribunal here makes a clear point that a relatively brief invoice description can be perfectly acceptable, since HMRC have plenty of powers to make further enquiries and to challenge VAT recovery if appropriate.