The VAT recovery position of intending traders has formed the basis of several court decisions in recent times, and this was again addressed in the case of Hedge Fund Investment Management Ltd (“HFIML”), heard by the First-Tier Tribunal. HMRC had raised an assessment in relation to input tax recovered by the business, on the basis that there was no link to any taxable economic activity. Furthermore, a penalty assessment was raised in relation to the recovery of this input tax for careless behaviour.

HFIML obtained authorisation from the Financial Conduct Authority in 2006 to carry out certain regulated activities, as detailed within a commercial business plan, including fund management activities in addition to research & advisory services. Detail regarding income to be received in relation to these activities was detailed within the business plan, for example whether this was to be subject to fixed fees or an hourly/daily rate. The intended fund management services were not provided for a prolonged period due to ongoing litigation in the Seychelles, which resulted in damages being awarded to the business. Within this timeframe, three invoices were raised by the business relating to the provision of research/advisory services and in addition to this introduction services were performed in relation to various clients, although no invoices were issued in the 4 years preceding HMRC’s investigation.

It was contended by HMRC that input tax incurred and recovered by the business via the submission of VAT returns could not be attributed to taxable economic activity undertaken by the business on the basis that, when the costs were incurred, there were no contractual agreements in place with customers, nor any expectation of receipt of payment. As such, in HMRC’s view, evidence that the business was trading at the time the claim was made could not be provided and an assessment was raised.

The First-Tier Tribunal concluded that activities performed by the business since it’s incorporation, were carried out for the purposes of generating taxable income in the future and were it not for the Seychelles litigation preventing the business performing fund management services (due to a lack of resources and potential reputational risk) taxable business activities would have carried out as per the business plan produced by the business. Consequently, the claim for input tax was granted to the extent it was directly attributable to an intended supply and an appeal against the penalty assessment was allowed.

This has proven to be a recurring issue for taxpayers, to the extent that HMRC issued HM Revenue & Customs Brief 10 earlier in the year detailing how businesses should approach determining whether or not an activity is an economic business activity for VAT purposes. For further guidance on this matter, please contact our free VAT helpline for expert advice from one of our team.