Input tax on legal fees in relation to loans

The taxpayer a fruit farming and packaging business had surplus cash in its bank account from past profits so decided to make a loan to unconnected third parties to earn interest. The loans were not repaid so the taxpayer took legal action to recover the money. As a result some of the loans were repaid but none of the interest.

The taxpayer claimed input tax on the legal fees on the basis they related to the protection of the company’s assets – an overhead cost linked to its taxable activities. It argued that there had been no exempt supply of loans because the third party paid no interest. HMRC said the loan agreements were supplies for consideration – the agreement to pay interest. The professional fees related directly to the exempt supply of making loans and there was no link between those fees and the taxable...