Entitlement to input tax - whether an economic activity was carried out

The taxpayer imported goods from China and Hong Kong and sold them in the UK. It used a company called RM to deliver many of the goods but after a trading dispute RM refused to do business with the taxpayer. To circumvent this problem a friend of the Y4 director set up a new limited company C Ltd and registered it for VAT. The company’s only activity was to set up an online account with RM and give the login details to Y4 so that deliveries could continue. A similar arrangement was made with another friend known as ‘Mr Man’ of the Y4 director which also set up an online account with RM.

RM invoiced the two new entities which raised invoices to the taxpayer which in turn claimed input tax. HMRC disallowed input tax claimed by the taxpayer on the basis...