In Melford Capital General Partner Ltd v HMRC [2020] TC7514, the First Tier Tribunal (FTT) held that VAT incurred in respect of the set-up and operating costs of a property fund was fully deductible. The fund only received dividends and was not making taxable supplies in its own right.

  • Melford is a general partner of a limited partnership (the fund). The fund owns an Isle of Man holding company that ultimately invests in commercial property through special purpose vehicles (SPVs). SPVs and their holding company are registered for VAT as a VAT group.
  • Melford, together with an LLP, which is above it, are registered for VAT as a separate VAT group. The LLP supplies advisory services to the SPVs. The activities of the fund are generally treated as activities of GP, Melford for VAT purposes.
  • The GP/LLP VAT group sought full VAT recovery on the set-up and operating costs.
  • HMRC contested the recovery as it regarded that the fund was simply holding shares in order to receive dividends and did not make any taxable supplies in its own right.
  • Melford appealed to the FTT on the basis of its VAT group registration. The GP and the LLP were a single taxable person acting as the holding company of the ‘SPV group’. Just as holding companies are not expected to apportion input tax incurred managing their subsidiaries between the dividends and management fees received, it and the LLP should be entitled to full input tax recovery.

The FTT concluded that there were no non-economic activities undertaken by the GP/LLP VAT group as any disposals would take place at either the SPV or Holdco level. This meant that the GP/LLP VAT group would never make an exempt supply but only taxable advisory services to the SPVs. Therefore, input tax was wholly attributable to the taxable supply of services and fully recoverable. The appeal was allowed.

Useful links

Partnerships & VAT
There are three types of partnership in England and Wales; each defined by a different partnership act.

Unlawful, illegal or ultra vires dividends
Is there a tax charge on an unlawful/illegal or ultra vires dividend?

External links

Melford Capital General Partner Ltd v HMRC [2020] TC7514

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