Input tax on legal fees for bringing High Court proceedings

The taxpayer was VAT registered with three members of the Bainbridge family trading as a partnership. Due to the senior partner’s ill health it was decided to transfer farming land owned by the individual partners to a discretionary trust. The land was all used for farming activities.

The partners believed that the transfers to the trust would not give rise to capital gains tax. However they discovered this was incorrect and were liable to a ‘crushing’ capital gains tax bill. The partners took legal action in the High Court to rescind the transfers and also against the former solicitors who had overlooked the tax problem. The High Court agreed that the creation of the trust had been a mistake and the trust was rescinded.

In February 2018 HMRC ruled that the farming partnership could not claim the input tax on the legal fees incurred as a result of...