Partnership claimed input tax on supplies made to limited company

A married couple were partners in a business - the taxpayer - that intended to convert two flats into bed and breakfast accommodation. They were also equal directors and shareholders in a limited company which traded as a horse-riding holiday business.

A dispute arose as to the input tax claimed on two invoices issued made out to and paid by the company for building works carried out on the two flats.

The problem was caused by the fact that the company used the flat rate scheme. The external accountant incorrectly said that input tax could be claimed on the invoices under the scheme rules because the expenditure exceeded £2 000 including VAT. This advice was wrong.

The partnership decided to register for VAT so it could claim input tax. However HMRC disallowed this claim. The taxpayer appealed on the basis that the input tax related to the taxable...