Input VAT: payments must be linked to intention to trade

In Hedge Fund Investment Management Limited v HMRC [2022] TC8596, the First Tier Tribunal (FTT) quashed penalties as it found that the taxpayer had an intention to trade and was able to reclaim input VAT to the extent that it could be established that it related to future taxable supplies. 

• Hedge Fund Investment Management Limited (HFIM) was regulated by the Financial Conduct Authority and undertook fund management and research consultancy services with a view of introducing investors to opportunities.
• HFIM received management fees for fund management and remuneration from the research consultancy.
• Between March 2015 and December 2018, HFIM claimed £45,852 of Input VAT and in the 14 periods in question, £3,540 of output tax was declared.
• HMRC blocked the claims for input tax on the basis that HFIM was not undertaking any economic activity and raised Penalties based on Careless Behaviour.
• HFIM Appealed.

The FTT found that:

• HFIM had shown that it intended to make taxable supplies as an intended trader at the time it incurred the input tax as:
  
  • Evidence indicated that HFIM was a trader with the intention of undertaking significant commercial activity:
    • HFIM had been registered with the FCA from 2006 and throughout the period in question.
    • It had a commercial and regulatory business plan.
    • Marketing material was professionally drafted and contained details of significant players in the corporate finance arena.
• However whether there was a link between the input vat paid and the taxable supplies that were intended to be provided in the future was unclear:
  • There was insufficient evidence for the FTT to reach a conclusion as limited evidence had been requested by HMRC.
  • This matter was referred back to the parties to review and decide upon.
• The penalty appeal was allowed as HFIM had satisfied the FTT that it was an intended trader, so had not acted carelessly.

Useful guides on this topic

Starting in business: VAT
One of the first decisions to make when starting in business is whether or not you should register for VAT.  Am I running a business for VAT purposes and if so, when do I register?

Input VAT: What constitutes a valid claim (& VAT invoice?)
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?

Penalties (VAT)
When do penalties apply for VAT? What penalties are charged and how can they be mitigated?

Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless? 

External links

Hedge Fund Investment Management Limited v HMRC [2022] TC8596