Heating Plumbing Supplies Ltd v HMRC (VAT – input tax) [2016] UKFTT 753 (TC) (10 November 2016)

Following the BAA case, it is common to see HMRC challenging the recoverability of input VAT incurred in legal and other fees in the context of certain M&A transactions. A recent FTT case suggests that HMRC’s position is not quite as strong as it first appears.

HPSL’s business was the wholesale distribution of domestic heating appliances and supplies to the trade and general public.

In Nov 2000, the directors decided to look into a MBO and engaged (1) EMW Law to provide banking and legal advice, as well as to implement the structure and (2) Grant Thornton to provide commercial and tax advice.

The MBO was presented to staff on the basis that it would create an independent company wholly owned by the staff and management. All staff could invest and about 50% did so.

The structure, which gave effect to the buyout, was for HPSL to be acquired by a new holding company, Heating Plumbing Supplies Group Ltd (HPSGL), which was owned by the management and staff. HPSGL was incorporated on 28/3/11.

HPSL registered for VAT before the MBO, but its registration was cancelled to set up the VAT group registration following the buy out.

HMRC decided that the HPSL had not made any supplies and disallowed £12,226 input tax, connected to the aforementioned professional fees, stating it wasn’t a cost component of a taxable supply.

The FTT held that the interests of the underlying business were at the heart of the restructure. The advice was sought and the restructure conceived for the purpose of developing the business, at the instigation of the Appellant. There was a direct and immediate link between the Services and Appellant’s business. The Services were provided for the purpose of furthering that business. Since the Appellant’s business consists wholly of the making of taxable supplies, the input tax in question was recoverable by the Appellant.

The company’s appeal succeeded.

This case is interesting because whilst decisions of the FTT are not binding, there does appear to be some agreement that the idea that input VAT is restricted, in such cases does not pass the common sense test. It’s worth noting however, that HMRC being very aggressive in this area after the BAA case and care should be taken when grouping or any other changes to business structures to ensure that VAT on professional fees can be recovered. One should also ensure that they follow the outcome of any appeal by HMRC in respect of the HPSL case.

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