27 May 2016
Q. My client and his son are in partnership running a farm. My client’s son has recently instigated divorce proceedings against his wife and the solicitor has informed him that she is entitled to a share of the farm assets, which, consequently we have had to get valued. The business has paid for the valuation to be carried out and the associated legal costs so will it be possible to recover the VAT incurred through the partnership? A. When determining whether input tax is recoverable, it is not sufficient that the business has merely funded the expenditure; it must also have been incurred for the purpose of the business. There is no absolute definition of “business purpose”, nor would one be totally appropriate given the wide variety of circumstances in which businesses operate. However, it is essential to establish whether or not there is a clear connection between the actual or intended use of the goods or services and the activities of the business. In particular, you need to consider whether the expenditure relates directly to the function and carrying-on of the business or merely provides an incidental benefit to it. In your client’s case although the divorce proceedings have impacted on the business, the costs incurred have not been incurred for the direct purpose of the business and so the VAT will not be deductible. The complexity of input tax recovery has been at the forefront of the VAT world this week as the Supreme Court delivered its judgement in the case of Airtours Holidays Transport Limited ruling 3-2 in favour of HMRC. One of the key points to come out of this decision is that being obliged to pay for services is not necessarily sufficient to reclaim the VAT incurred. Are you unsure about whether any of your clients are entitled to recover input tax? As HMRC continue to impose penalties on those who don’t comply why not contact the VAT Advice on 0844 561 8101 to discuss the issue. Our team of experts have a wealth of experience and can also provide a written consultancy service at £180 per hour plus VAT. Or, learn more about our tax consultancy services.
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