On 17 July 2015, the First-tier Tribunal (in Robert Welch Designs Ltd v HMRC6) held that   certain professional services were supplied to a taxpayer’s majority shareholders, and not the taxpayer company itself, with the result that the taxpayer’s claim to recover input tax on those services failed.

The professional services fees in question were predominantly legal fees in connection with a legal dispute between the majority shareholders and minority shareholder in a family company. The company sought to claim input tax recovery on those fees however, the Tribunal agreed with HMRC that such recovery should not be allowed as:

  • the lawyers’ invoices were in each case addressed to the majority shareholders (and not the company). Applying the Court of Appeal’s guidance in the Airtours7 case (for a discussion on which, see here), this “contractual” position is the starting point when looking at to whom services are supplied for VAT purposes
  • the lawyers refused to re-issue their invoices to the company (the inference being that the lawyers did not consider the company to be their client)
  • the “economic reality” was, in the Tribunal’s view, not inconsistent with the contractual position; the interest of the company and the majority shareholders were intertwined and the legal proceedings had been brought in the name of the shareholders
  • the required “direct and immediate” link between the professional services and the company’s business was not present. Although it was recognised that the removal of the minority shareholder allowed the majority shareholders (and directors) to focus more fully on the company’s business, this was too far removed to allow input tax recovery.

The decision can be viewed here.