VAT-registered business owners can recover input tax for VAT costs associated with running their business, but this might not include all VAT even if it directly relates to the owner of the business. The circumstances of this case heard at the first-tier Tribunal are unusual, but it illustrates a pertinent point concerning what VAT reclaims are not allowed, and also highlights the issues of the "wholly and exclusively" rule in relation to VAT reclaims and business expenses in general.
Substantia Invest Ltd and HMRC
Substantia Invest Ltd is a property-development company that appealed HMRC’s decision to reject an input-VAT reclaim of over £20,000.
Circumstances of the VAT input reclaim
The VAT-reclaim related to legal services incurred to defend Substantia’s owner from criminal charges of false accounting. HMRC refused the owner’s right to recover the VAT element of the legal costs incurred because they did not directly relate to the provision of taxable supplies.
Why, according to HMRC and the law
Substantia Invest Ltd is a "one man business", that is, an owner-managed business operated by the owner. This means that while HMRC did not doubt that the legal services were supplied directly to the owner of the business, they did not accept that the services were primarily to serve the interests of the business; the legal services in fact served the private interests of the owner.
Remember the "Wholly and exclusively" rule
In order to recover input-VAT, the goods or services to which the reclaim relates must benefit the business, have a direct link to its trading activities, and be for the purpose of the business; furthermore, in order to make a claim to recover VAT for legal fees, the offence must be committed in the course of employment.
The first-tier Tribunal could not find a direct connection between the legal services supplied and the ongoing provision of taxable supplies by Substantia Invest Ltd.
The salient point to take away and never forget is that in order to recover input-VAT certain conditions must be satisfied. I cannot see why any business owner would not seek advice from an accountancy expert before putting this sort of reclaim through, especially due to the nature of the legal case against this particular business owner. I find it hard to imagine an accountant that would allow a business owner to make this claim if s/he had all the facts. See our blog for further discussion of VAT, the VAT flat-rate scheme and expenses. Please contact your account manager with any further questions where we may offer expert assistance, guidance, and advice.