Factual and Procedural Background
The Appellant, a limited liability partnership of solicitors with approximately 25 partners, employed Company A to perform accounting and tax compliance services. The dispute arose from input VAT claimed by the Appellant on invoices issued by Company A for work related to partners' tax reserves and individual partners' tax returns. The Respondents issued assessments disallowing part of the input tax claimed, which the Appellant appealed. The assessments included an original tax amount of £18,647, later adjusted to £18,024, and a further assessment of £750 for other accounting periods. Evidence was heard from a partner at Company A overseeing the client relationship and an officer from the Respondents who conducted an inspection and disallowed the input tax.
The partnership agreement included a clause (Clause 12) allowing the partnership to retain a proportion of each partner's share of profits as a tax reserve to meet individual partners' future tax liabilities. This reserve was used by the partnership as working capital. Company A invoiced the Appellant on a per-partner basis for various services, including preparation of partnership tax returns, calculation of tax reserves, and preparation of individual partners' tax returns. The invoices described the services as related to "partners personal tax returns," although the tribunal found this description inaccurate.
Legal Issues Presented
- Whether the VAT charged on invoices from Company A was input tax recoverable by the Appellant.
- Whether the services invoiced related to the partnership's business purposes or to individual partners' personal tax liabilities.
- Whether the Tribunal had jurisdiction to consider the Appellant's reliance on a concessionary policy by the Respondents concerning de minimis amounts.
- The proper apportionment of VAT where a single supply includes both business and non-business elements.
Arguments of the Parties
Appellant's Arguments
- The majority of the invoiced amount related to work on partners' tax reserves and partnership tax returns, which are business expenses and thus input tax.
- A smaller portion related to individual partners' personal tax returns, which they argued was de minimis and should be allowed under the Respondents' concessionary guidance.
- The Appellant sought to rely on section 24(5) of the Value Added Tax Act (VATA) 1994 to apportion input tax on a single supply of services.
Respondents' Arguments
- All invoiced services related to individual partners' personal tax liabilities and were therefore not recoverable as input tax of the partnership business.
- The de minimis concession did not apply as the amounts were not small, and the Tribunal lacked jurisdiction to adjudicate on the concession.
- The Appellant incorrectly reclaimed VAT on services not used for the purpose of its business.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Midland Bank plc C-98/98 [2000] STC 501 |
Input tax must have a direct and immediate link to an output tax transaction to be recoverable. |
Used to analyze whether the invoiced services related directly to the partnership's business or to individual partners' personal liabilities. |
| I/S Fini H C-32/03 |
Unanticipated consequential costs incurred by a business can have a direct and immediate link to business overheads. |
Supported the view that some legal costs related to business overheads are recoverable. |
| Rosner [1994] STC 228 |
Legal costs of defending a sole trader are only recoverable if the offence relates directly to the trading activity. |
Applied analogously to conclude that preparation of individual partners' tax returns was not a business expense. |
| National Westminster Bank [2003] STC 1072 |
The Tribunal does not have jurisdiction to decide whether an appellant meets the terms of a concession. |
Referenced in discussing the Tribunal's jurisdiction over the de minimis concession. |
| Arnold [1996] EWHC Admin 52 |
Similar to National Westminster Bank on Tribunal jurisdiction over concessions. |
Referenced regarding jurisdiction issues. |
| J H Corbitt (Numismatists) Ltd [1981] AC 22 |
Obiter suggesting Tribunal could adjudicate on whether terms of an extra statutory concession were met. |
Considered in the context of Tribunal jurisdiction. |
| Oxfam [2009] EWHC 3078 |
High Court decision that Tribunal has jurisdiction to adjudicate on extra statutory concessions. |
Used to support possible Tribunal jurisdiction pending further cases. |
| Stichting goed Wonen C-376/02 and Marks & Spencer C-62/00 |
CJEU authority that Member States must give effect to legitimate expectations under the Principle VAT Directive. |
Referenced in relation to legitimate expectation and concessionary policies. |
Court's Reasoning and Analysis
The Court first examined the nature of the services invoiced by Company A. It found that the invoices bundled multiple services into a single supply described as "partners personal tax returns," but this description was inaccurate. The Court distinguished between work related to the partnership's business and that related to individual partners' personal tax liabilities.
Items relating to preparation of the partnership tax return and management of partners' tax reserves (used as working capital) were held to be for the purpose of the partnership's business. These included preparation of monthly tax reserves, production of partnership drawings schedules, provision of partnership profit information, reconciliation of tax reserves, and ad hoc advice on tax reserves. Such services had a direct and immediate link to the partnership's business and thus constituted input tax recoverable by the partnership.
Conversely, services related solely to the preparation of individual partners' personal tax returns and payment of their personal tax liabilities were not for the purpose of the partnership business. Although beneficial to the partnership, these services lacked the required direct and immediate link to the business and therefore did not qualify as input tax.
The Court accepted the Appellant's reliance on section 24(5) VATA 1994 to apportion VAT on the single supply of services. It concluded that the VAT attributable to services connected to the partnership business should be recoverable, while that attributable to individual partners' personal tax matters should not.
Regarding the Respondents' concessionary policy on de minimis amounts, the Court found that the policy was a discretionary concession, not a statement of law, intended to avoid disputes over small sums. The Appellant's invoices were for substantial amounts and did not qualify as small. Furthermore, the Tribunal likely lacked jurisdiction to adjudicate the concession's application. Even if jurisdiction existed, the Appellant failed to show detrimental reliance on the concession.
Holding and Implications
The Court's final decision was to ALLOW THE APPEAL IN PART. Specifically, the appeal succeeded to the extent that VAT charged on services related to the partnership's business purposes, namely items concerning the partners' tax reserves and the partnership tax return, was recoverable as input tax.
The appeal failed in so far as it related to VAT charged on services connected solely to individual partners' personal tax returns and liabilities, which were not business expenses.
The Respondents' assessments were upheld to that extent. The Court did not establish any new precedent but clarified the application of input tax recovery principles to mixed supplies involving partnership business and individual partners' personal tax matters. The parties were invited to agree the apportionment of VAT or return to the Tribunal for determination.