Input tax on legal fees incurred pre-incorporation

The taxpayer’s director M developed software that he wanted to sell through a limited company. However his former employer challenged his right to use the software and sued him for infringement of copyright breach of confidence and breach of contract. M signed a letter of engagement personally with a firm of lawyers and eventually won his case. He then formed Koolmove Ltd to start trading and developing the software.

The company claimed input tax on the legal fees on its VAT returns but HMRC disallowed them. All but one of the purchase invoices related to the period before the company was formed in July 2016. HMRC said the supply of services was between the director and the lawyers and not the company. The fees did not relate to taxable supplies made by the company because there was no evidence that it had the right to use the...