In Praesto Consulting UK Limited v HMRC [2019] EWCA Civ 353 the Court of Appeal allowed an input VAT claim in respect of legal fees invoiced to the director and not to the company.
- Customer Systems plc (CSP) claimed damages for loss of business against Mr Ranson, its former employee who left with a customer list and set up a rival business Praesto Consulting (Praesto).
- CSPs claim was estimated by reference to work done by Praesto, or as an alternative CSP sought Mr Ranson’s profits as sole shareholder and director of Praesto.
- Mr Ranson won his case on appeal.
- Mr Ranson’s lawyers, Sinton’s submitted nine invoices in respect to his defence, the first was billed to Praesto and the other eight to Mr Ranson.
- Praesto claimed back input VAT of £79,932 in total. HMRC disallowed input VAT on the eight invoices in Mr Ranson’s name.
Praesto appealed.
In allowing the claim for input VAT the FTT found that:
- CSP would have sought to join Praesto as a party if it had been successful on liability and thus legal services were supplied to Praesto just as much as if it had been a party.
- Praesto sought to protect its profits and therefore had a direct interest in CSP's claim being dismissed.
HMRC appealed to the Upper Tribunal (UT)
The UT allowed HMRC’s appeal. It held that:
- The FTT had failed to make a finding as to whether Praesto was contractually entitled to the legal services provided by Sintons, and that this failure was an "error of approach" which amounted to an error of law.
- If contrary to the above, services were supplied to Praesto, they were not used by it for the purposes of its business.
Praesto appealed to the Court of Appeal (CA)
The CA held that the FTT had not erred in law in concluding that the invoices related to services supplied by Sintons to Praesto:
- Mr Ranson and Praesto were both clients of Sintons.
- Praesto engaged Sintons on a retainer. Objectively the reason was to limit any liability arising from its taxable activities.
- Praesto had a direct interest in CSP's claim being dismissed.
It also held that the FTT had not erred in law in concluding that the services supplied by Sintons had a direct and immediate link to Praesto's taxable activities.
- The correct test, as established by CJEU case law, is that a supply will be treated as being used for the purpose of the business of a taxable person if there is "a direct and immediate link" between the supply and one or more output transactions or between the supply and the taxable person's economic activity as a whole.
- The proceedings were effectively being brought against both Mr Ranson and Praesto, targeting the profits made by Praesto with the aim of putting it out of business.
- There was a real risk of the claim against Praesto being brought by CSP.
Dissenting view
One of the three CA judges took a different view, he disagreed that the evidence had proven a direct and immediate link between the supply and Praesto:
- 'It is an obvious inference that the reason the invoices were addressed to Mr Ranson was so that, if he was successful in the litigation, he could recover his costs from CSP. '
- 'I would regard it as, at best, highly speculative whether any application to join Praesto in the existing proceeding could have succeeded.'
Comment
This answers quite a lot of things. When client asks you that simple question, can my company reclaim input VAT is allowable in respect of an invoice addressed to me? You can direct them to this judgment.
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