The Tribunal has upheld HMRC's decision that a company (Danesmoor Ltd) should not be entitled to recover input VAT incurred on professional fees for a corporate restructuring. HMRC had not allowed the recovery of the input VAT on the grounds that the services were not provided to the company. The appellant argued that the advisors had been engaged and paid for by the company directly in connection with the restructuring and as such the input VAT should be recoverable.

In reaching its decision the Tribunal considered two basic issues; ‘to whom were the services rendered’ and ‘for what purpose’. The Tribunal reviewed the evidence in detail and concluded that the legal and tax advice given was done so in connection with the tax implications for the individual shareholders rather than the company. Furthermore, it became clear that the company had already decided on how to undertake the restructuring prior to engaging the advisors.

The Tribunal took the view that the payment of the tax advice and legal services by the Company amounted to ‘an added inducement’ to persuade the shareholders ‘to sell their shares’. In deciding the case, the Tribunal supported HMRC’s decision that the company’s input tax claim was invalid as the claim was not made by the person to whom the supply was made.

Crucial to this decision was the Tribunal's approach of stepping behind the documentary evidence and examine the economic reality of the arrangement. This lead to the Tribunal’s decision that that in reality the services were provided, in the most part, for the benefit of the shareholders and not the company. Accordingly the appeal failed.

Of further importance is the Tribunal's consideration of the outcome if a supply of services to the company been established. The Tribunal confirmed that under such circumstances the supply would have failed the ‘purpose test’ in any event. The Tribunal was not satisfied that the services had been provided in the course of, or for the furtherance of, the company’s business.

Companies and advisors need to be clear who in reality will benefit from the supply of services from the outset. Consideration should also be given to determine, both on paper and in practice, if a supply is for the benefit of an engaging company and whether it has been incurred for the course of that company’s business.