Is input tax paid by a company for advice on acquiring the company claimable? The case of Heating Plumbing Supplies Ltd v HMRC [2016] UKFTT 753 indicates that it may be, depending on the purpose of the acquisition.

The taxpayer was in the business of wholesale distribution of domestic heating and plumbing appliances. When its board of directors decided to look into a management-led buyout, it engaged two law firms to give advice. As part of the buy-out, a new holding company owned by the management and staff was incorporated to hold the shares of the taxpayer. The taxpayer’s VAT registration was cancelled and replaced by a group VAT registration with the taxpayer as the representative member of the group.

The taxpayer sought to claim input tax on the legal fees paid to the two law firms but the HMRC rejected the claim on the basis that the legal services were provided in respect of the management buyout and did not relate to any taxable supplies made by the VAT group. In addition, the HMRC took the view that the costs associated with the takeover by a holding company of the shares in a company that itself made taxable supplies, were not costs of that underlying business.

The First Tier Tribunal agreed with the taxpayer that the purpose of the legal services was to facilitate the management-led buyout to enable employees to acquire a stake in the business with a view to developing and enhancing that business. The legal services thus had a direct and immediate link to the taxpayer’s business. If, on the other hand, the legal services had been sought to facilitate the acquisition of shares by a third party with a view to receiving a dividend, then there would be no direct and immediate link with the taxpayer’s taxable supplies.

Editorial Note

This is an interesting case as the Tribunal found that the acquisition of the taxpayer was for the purpose of enhancing the taxpayer’s business. As a result, the legal fees paid for advice on the acquisition was regarded as costs of the underlying business and the input tax paid accordingly became deductible. The same result should likely prevail under our GST Act.