Nature of link between advertising costs and sales

The taxpayers paid Google Ireland Ltd for online advertising services so would declare VAT by doing the reverse charge on their quarterly UK VAT returns. HMRC said that the box 4 input tax entry should have been restricted under the rules of partial exemption because the advertising related to the taxpayers’ sales of both sofas – which were taxable - and insurance products taken out by customers when they had bought a sofa. It considered the taxpayers were insurance intermediaries earning a commission which was exempt.

The department issued assessments to both taxpayers disallowing input tax on the basis that the input tax was residual for partial exemption purposes ie it related to both taxable and exempt supplies. The taxpayers claimed that the advertising was directly related to sofa sales only and the insurance income was an indirect link.

The First-tier Tribunal considered the extensive previous case law...