Input tax claimed on fees for advice about directors’ bonus payments

The taxpayer engaged tax advisers to advise on how to pay bonuses to three directors in the most tax efficient manner in 2012 and 2013. It claimed the input tax on the advisers’ invoices against its output tax.

HMRC refused saying the transactions were to reward the directors in their personal capacity; the disputed input tax was therefore not a business expense and not linked to the company’s taxable activities. 

The taxpayer appealed.

The First-tier Tribunal disagreed with HMRC. It said the purpose of the fees was relevant to the company. This was because the scheme produced a 13.8% saving on class 1A National Insurance contributions payments and it rewarded employees. The judge said ‘reward and incentivisation of employees is one of the more obvious overheads of the business that is treated as a cost component of the company’s overall economic activities’. It was irrelevant that the expenditure related to non-contractual...