A recent Court of Appeal (“CoA”) judgement released on the 11 March 2019, in the case of Praesto Consulting UK Ltd (“Praesto”), concerned VAT recovery on legal fees by a company. The issue was not straightforward, as a company director had been issued with invoices in his name. Praesto paid the costs.
The question that arose was whether Praesto was entitled to VAT recovery on legal fees which it had settled, in the defence of civil proceedings brought against its company director.
Was there a supply to Praesto? Was there a “direct and immediate link” to Praesto’s taxable supplies?
Mr Ranson was formerly an employee of Customer Systems plc (“CSP”). He later resigned to set up a new company, Praesto Consulting UK Ltd (“Praesto”), that was in direct competition with CSP.
CSP issued proceedings against Mr Ranson and other employees, but not against Praesto. It claimed damages by reference to the business it had lost, as a direct result of Praesto being established.
Mr Ranson and Praesto instructed solicitors (Sintons) to act on their behalf. Sintons raised eight invoices on Mr Ranson alone, with no mention of Praesto in the description of the work provided.
Praesto sought to recover VAT of £79,932 in respect of the said invoices. HMRC disagreed and issued an assessment to recover the VAT.
The First-tier Tribunal (“FTT”) had found in favour of Mr Ranson, with the Upper Tribunal finding in favour of HMRC.
The two issues to be determined by the CoA were:
- Did the FTT err in law concluding that the invoices related to services provided by Sintons to Praesto?
- Did the FTT err in law concluding that the services had a “direct and immediate” link to Praesto’s taxable activities?
In relation to first question raised, the CoA decided that although the FTT made no express finding of a contractual relationship that existed between Sintons and Praesto, the findings which they made clearly established such a relationship:
- Mr Ranson’s instructions were given on behalf of both himself and Praesto;
- Sintons acted on behalf of both Mr Ranson and Praesto in relation to the litigation;
- Both parties were clients of Sintons; and
- Sintons had undertaken all work on behalf of both parties.
There was said to be a joint retainer whereby Sintons was instructed by both parties, resulting in them both being entitled to Sintons’ services. Furthermore, they would both be held jointly and severally liable for the legal fees.
Accordingly, there was no error of law in the FTT’s conclusion that the invoices related to services supplied by Sintons to Praesto.
In relation to the second question raised above – was there a “direct and immediate” link to Praesto’s taxable activities? – the following were findings made by the FTT:
- The services it had found Sintons supplying were equally supplied to both parties;
- Should CSP have succeeded in its original claim, it would have added Praesto to the proceedings and laid claim to the profits which it had made;
- If CSP had been successful, Praesto would have had to pass on the profits made from its activities;
- Praesto accordingly had a direct interest in CSP’s claim being dismissed; and
- It had accordingly received legal services from Sintons to limit its liability.
Therefore, the legal services supplied prevented the risk of destruction of Praesto’s business. There was a “direct and immediate” link to Praesto’s taxable activities.
Finally, the P&O Ferries (Dover) Ltd (1992) [VATTR 221] case was cited where criminal proceedings were brought against P&O employees and the company, arising out of the “Herald of Free Enterprise” Zeebrugge disaster. In this case also, the real risk of proceedings being brought on company employees could have had a disastrous effect upon the business activities of the company. In this case it was held that “…the legal services in question were, therefore, used for the purpose of the Company’s business”.
Who is potentially affected?
The court considered the circumstances of this case to be unusual. Ordinarily where a claim is brought against a former employee or director, the claim will be made against both the individual and the company. In such a case, there would likely be no issue as to the entitlement of the company to claim recovery of VAT. In this instance, the claim was only made against the sole director and three employees of the business.
However, it is a good reminder of the rules surrounding VAT recovery on directors’ costs:
- Where they are incurred for a director in his/her personal capacity, VAT recovery should be restricted;
- Alternatively, where there is a business purpose with other conditions being satisfied, VAT recovery may be available for the company.