The First-tier Tribunal decision in Doran Bros may resonate as a case for our times, writes Graham Elliott (City & Cambridge Consultancy).
The issue in Doran Bros [2017] UKFTT 829 (TC) was muddied by the untidy path the case made towards the tribunal hearing itself. By the time the tribunal judge sat down to listen to the arguments, two of HMRC’s defences had largely been abandoned, including whether the invoice was defective as a document, and whether the cost had a link solely with ‘investment gold’ (which was the vehicle eventually chosen to put in effect the final outcome). These gave way to the critical point of interest to all of us, namely the conclusion that the issue was whether VAT can be reclaimed on costs of a packaged tax avoidance scheme.
This cannot be new. VAT paying businesses have claimed VAT on advice from the tax avoidance profession for years, with little if any allegation by HMRC that this was not a true cost of the business. A reading of this case reveals how little case law of any relevance was cited by the tribunal, and none on the specific point of whether avoidance planning is really a business cost, in the VAT sense of the ‘direct and immediate link’. What caused this one to get this far?
It may have been those messy aspects, which propelled the case towards the courts, where HMRC otherwise would have dropped it. But once it was there, the game was afoot.
Unfortunately for HMRC, it did not turn this into the great new dawn in which costs of avoidance planning are to be treated as non-recoverable for VAT purposes. To achieve that end, it had to win the argument that there was an insufficient (if any) link with the underlying taxable supplies. The arguments seemed hazy. There was a reference to this plan being outside the norm of a general business overhead, but with no real idea as to where the boundary of ‘the norm’ would be drawn. Reference was made to the tax mitigation being in regard to one director of the company (who essentially was its owner) and thus of benefit to that individual, which was accordingly not a benefit to the company. But the tax mitigation was of benefit to both: initially to the company in reducing employment taxes, and then downstream to the owner in the form of increased profits which he could convert to his earnings.
No attempt appeared to be made to put the bold and unambiguous argument, that any purchase of pre-packaged schemes could not be regarded as being a cost of the taxable business but was solely a cost of tax management, which was, accordingly, merely a by-product of the business. The day for such an argument must be coming, but Mr Doran was spared it.
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VAT on the costs of tax avoidance
The First-tier Tribunal decision in Doran Bros may resonate as a case for our times, writes Graham Elliott (City & Cambridge Consultancy).
The issue in Doran Bros [2017] UKFTT 829 (TC) was muddied by the untidy path the case made towards the tribunal hearing itself. By the time the tribunal judge sat down to listen to the arguments, two of HMRC’s defences had largely been abandoned, including whether the invoice was defective as a document, and whether the cost had a link solely with ‘investment gold’ (which was the vehicle eventually chosen to put in effect the final outcome). These gave way to the critical point of interest to all of us, namely the conclusion that the issue was whether VAT can be reclaimed on costs of a packaged tax avoidance scheme.
This cannot be new. VAT paying businesses have claimed VAT on advice from the tax avoidance profession for years, with little if any allegation by HMRC that this was not a true cost of the business. A reading of this case reveals how little case law of any relevance was cited by the tribunal, and none on the specific point of whether avoidance planning is really a business cost, in the VAT sense of the ‘direct and immediate link’. What caused this one to get this far?
It may have been those messy aspects, which propelled the case towards the courts, where HMRC otherwise would have dropped it. But once it was there, the game was afoot.
Unfortunately for HMRC, it did not turn this into the great new dawn in which costs of avoidance planning are to be treated as non-recoverable for VAT purposes. To achieve that end, it had to win the argument that there was an insufficient (if any) link with the underlying taxable supplies. The arguments seemed hazy. There was a reference to this plan being outside the norm of a general business overhead, but with no real idea as to where the boundary of ‘the norm’ would be drawn. Reference was made to the tax mitigation being in regard to one director of the company (who essentially was its owner) and thus of benefit to that individual, which was accordingly not a benefit to the company. But the tax mitigation was of benefit to both: initially to the company in reducing employment taxes, and then downstream to the owner in the form of increased profits which he could convert to his earnings.
No attempt appeared to be made to put the bold and unambiguous argument, that any purchase of pre-packaged schemes could not be regarded as being a cost of the taxable business but was solely a cost of tax management, which was, accordingly, merely a by-product of the business. The day for such an argument must be coming, but Mr Doran was spared it.
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