When is input VAT not recoverable?

 Where certain costs are incurred by principals of businesses, it is common for HMRC to say that the costs were not a cost of the business per se and input tax should not be allowed. A recent case about this issue is that of "A Partnership" (TC04358).This was an anonymised case concerning an "1890 Act" partnership which had, at one time, consisted of four partners report Harris & Co chartered accountants Northampton

A legal dispute arose when one of the partners sought to dissolve the partnership, having reached retirement age, in order to extract goodwill which, in the normal course of retirement, would not have been paid out. He alleged bad faith against two of his three partners concerning previous fruitless plans to sell the business.

Since his accusation was only against two of the three partners, these conjoined to obtain legal representation.

The third partner, however, felt that he had an interest in the matter since he did not want to see the partnership dissolved. He took separate legal advice. It was considered by the three partners that it was appropriate to have separate legal firms representing the conjoined partners on the one hand, and the single partner on the other.

The partnership claimed VAT on both sets of fees. The invoices, however, were addressed to the respective partners.

HMRC denied input tax recovery on several grounds.

First, the supplies in question were not to the partnership at all.

The second, even if they had been, the dispute was not to do with the business of the partnership but simply the financial investment that each partner had made, and therefore did not have a sufficiently direct and immediate link with the taxable trade.

Finally, there was no invoice in the name of the partnership as such.

The First Tier Tribunal supported HMRC and rejected the appeal.