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Input tax on legal fees incurred by a company director

A property development company was incorporated in January 2013 and registered for VAT with effect from the same date.

It submitted repayment VAT returns for periods to November 2013 claiming input tax of £23 367 and declaring no output tax. The claim related mainly to legal fees incurred by the company’s sole director and owner to defend himself against charges of false accounting.

HMRC rejected the claim on the basis that the company was not carrying on a taxable business and there was no direct and immediate link between the input tax and supplies made by the taxpayer. The Revenue said the legal fees were personal expenses of the director relating to a criminal prosecution.

It also argued that the activity of the company was to identify hotels that were trading badly refurbish them and sell them. Two...