Precedents Cited

The judgment references several key cases and statutory provisions that shaped the Tribunal's decision. Notably:

• HMRC v Michael Fleming (t/a Bodycraft) [2008] UKHL 2: Established the criteria for retrospective VAT claims, emphasizing timely submissions and adherence to applicable laws.
• Kretztechnik AG v Finanzamt Linz (Case C-456/03) [2005] STC 1118: Clarified that the issuance of shares does not constitute a VATable supply, thus input VAT on related expenses could be recoverable if the shares are not exempt supplies.
• Ernst & Young v Commissioners of Customs and Excise [1997] VATDR 183: Affirmed that input VAT on staff entertainment expenses is fully recoverable when incurred for business purposes.
• Morrison Bowmore Distillers Ltd v HMRC [2010] UKFTT (TC): Supported the notion that logical and consistent methodologies based on available facts are sufficient for retrospective claims.
• Guide Dogs for the Blind Association v HMRC [2012] UKFTT 687 (TC): Reinforced that the burden of proof remains on the claimant regardless of the time elapsed since the events in question.

Legal Reasoning

The Tribunal meticulously examined whether KDM met the legal standards for retrospective VAT claims as outlined in the aforementioned cases. Central to this was determining if KDM could prove that it did not recover the input VAT when it was incurred and whether the claimed amounts were accurately estimated.

For the share issuance expenses, the lack of consistent accounting treatment across different years and the discrepancies in VAT recovery methods raised doubts about the reliability of KDM's claims. The Tribunal noted that while Mr. Spilling, the CFO, provided evidence of belief in the non-recoverability of VAT, this was insufficient without concrete documentation to back the claims.

Regarding staff entertainment, the Tribunal found that KDM's methodology lacked credibility, especially since the Commissioner’s policy from 1993 onward allowed full recovery of VAT, contradicting KDM's assertion of recovering only 50%. The sudden withdrawal of claims for periods before 1993 further eroded the trustworthiness of KDM's arguments.

The Tribunal concluded that KDM failed to demonstrate, beyond reasonable doubt, that the VAT was unrecovered, thereby not satisfying the burden of proof required for such retrospective claims.

Impact

This judgment underscores the stringent requirements for retrospective VAT claims, particularly emphasizing the necessity for consistent and thorough documentation. Businesses must maintain clear and accurate records of VAT treatments to substantiate any claims for recovery. The decision serves as a cautionary tale against relying solely on internal records or post hoc adjustments without robust evidential support.

Additionally, the case highlights the importance of understanding and adhering to evolving VAT policies. Companies must stay informed about legislative changes and ensure their accounting practices reflect current laws to avoid complications in tax recovery.

Future cases involving retrospective VAT claims will likely reference this judgment, reinforcing the need for meticulous record-keeping and cautious methodology in estimating unrecovered VAT.

Retrospective VAT Claims (Fleming Claims)

Retrospective VAT claims, often referred to as "Fleming claims" after the foundational case HMRC v Michael Fleming, involve seeking recovery of VAT that was not initially reclaimed. To be successful, a business must prove that it paid VAT on allowable inputs but did not recover it via its VAT returns. These claims must be filed within statutory time limits and require robust evidence to substantiate the non-recovery and accurate estimation of the VAT amounts.

Input VAT and Output VAT

Input VAT is the VAT a business pays on purchases and expenses related to its taxable activities. Output VAT is the VAT a business charges on its sales. Businesses can typically reclaim input VAT from HMRC, provided the expenses are for taxable transactions. The balance of input VAT over output VAT results in either a refund or a liability to HMRC.

Exempt Supplies

Exempt supplies are specific goods or services that are not subject to VAT. If a business makes exempt supplies, it may not be able to reclaim all of its input VAT, leading to a "residual input tax" that must be accounted for. Proper classification of supplies is crucial for determining VAT recovery rights.

SSAP 5 and FRS 4

SSAP 5 (Statement of Standard Accounting Practice 5) outlines the standard accounting practices for VAT, emphasizing that VAT should not be included in income or expenditure unless it is irrecoverable. It guides businesses on accurately reflecting VAT in their financial statements.

FRS 4 (Financial Reporting Standard 4) pertains to the accounting of capital instruments, including shares. It mandates that issue costs directly related to capital instruments should be accounted for as a reduction in the proceeds from the capital raised, rather than as assets.