In Doran Bros (London) Limited v HMRC1 , the First-tier Tribunal (FTT) found that input VAT on tax planning advice given to a company, which also greatly benefited its sole director, was recoverable.
Doran Bros (London) Limited (the Appellant) was a building company. Mr Doran was the sole employee, director and shareholder of the Appellant. Mr Doran, on behalf of the Appellant, obtained advice from Quibic Tax in relation to an Employee Benefit Trust (EBT) arrangement. As a result of that advice, the Appellant purchased £6.1m of investment gold which was put into an EBT for the benefit of Mr Doran. The Appellant paid Quibic Tax £50,000 plus £10,000 VAT for its services and claimed the input tax from HMRC. HMRC denied the input tax on the basis there was an insufficient connection between the tax advice received and the taxable activities of the Appellant which related to building, renovation and construction services.
The FTT allowed the appeal.
The FTT found that the advice given to the Appellant related to minimising the tax and national insurance contributions (NICs) which were payable by the Appellant if it chose to reward Mr Doran. The FTT accepted HMRC’s contention that Mr Doran had benefited from the advice but found as a matter of economic reality, the services had been supplied to the Appellant pursuant to the contractual terms of the engagement. In relation to whether there was a sufficient connection between the expenditure incurred for the tax advice and the taxable activities of the Appellant, the FTT found that the fact that it also benefited Mr Doran, did not preclude it from being for the purposes of the business of the Appellant. The FTT concluded that advice given to a taxable person on how it can reduce its tax and NICs liabilities on making payments to its employees, is advice for the purposes of its business and a general overhead of the business.
The FTT associated the expenditure on the tax planning arrangements with normal payroll expenditure. This is a helpful case for businesses incurring expenditure in relation to the remuneration of their employees. It will be interesting to see whether HMRC will take this case further given their general attitude towards tax avoidance arrangements. In order to succeed on appeal, HMRC will need to show that there was an insufficient link between the tax planning advice and the underlying taxable supplies of the Appellant.
A copy of the decision can be found here.