In Merlin Scientific LLP v HMRC [2015] TC04441, the First Tier Tribunal (FTT) overturned HMRC's refusal to allow a deduction against taxable profits and a credit for input VAT in respect of corporate meeting services.


MSL makes supplies of consultancy services to its associated company (MSB), and as part of the provision of those services it is also required to provide a venue.

MSL therefore made a payment to Glebe Corporate LLP (GCL) for a venue at which to supply consultancy services and recharged the whole amount of the invoice to MBL in addition to its own fee.

MSL took an income tax deduction for the net amount paid to GCL and reclaimed all of the input VAT charged.

HMRC's position

HMRC contended that the payments to GCL predominantly related to the provision by MSL of business entertainment free of charge to MSL's clients and contacts, and that the relevant proportion of the cost should be disallowed for income tax and the relevant proportion of VAT should not be reclaimed. 

HMRC decided that the relevant proportion should be two thirds.

MSL's position

MSL contended that HMRC had fundamentally misunderstood the arrangements.

MSL is obtaining the use of the facilities from GCL and making an onward supply of these to MBL as an ancillary supply to its consultancy services. 

MSL provides to MBL a composite supply of services consisting of a predominant supply of consultancy services and an ancillary supply of corporate meeting facilities, which may include a minimal amount of business entertaining.

MSL argued that:

  • MBL pays MSL in full for the meeting facilities so if this supply does include an amount for business entertaining it is not free of charge
  • If there is any provision of business entertainment it is supplied by MBL and not by MSL
  • Even if, despite the above, there is a supply of business entertainment by MSL it is minimal and HMRC's decision to disallow two thirds of the cost and the input VAT cannot be sustained

Tribunal decision

The FTT agreed with MSL:

  • If there was an element of business entertainment it was a minimal amount of a composite supply
  • All costs were recovered and so nothing was provided by MSL 'free of charge'
  • Any restriction for business entertainment would be at the associate level

Case reference

Merlin Scientific LLP v HMRC [2015] UKFTT TC04441