Tribunal unimpressed with HMRC bringing a case concerning input tax recovery on tax advisory costs nearly identical in facts to a case it lost three years ago.

In the recent Taylor Pearson (Construction) Ltd case (TC07464), the company engaged two separate tax advisers to advise them on how to pay bonuses to three directors in the most tax-efficient manner in 2012 and 2013.

HMRC suggested that the purpose of the expense was to reward the directors in their personal capacity, so the disputed input tax of £9,970 was not a business expense and not linked to the company’s taxable activities.

The tribunal decided that the purpose of the expense was clearly relevant to the company for two reasons:

  • The proposed scheme produced a 13.8% saving on the bonuses, in the form Class 1A NIC;
  • It rewarded the company’s employees: “reward and incentivisation of employees is one of the more obvious overheads of the business that is treated as a cost component of the company’s overall economic activities.”

The tax payers’ appeal was therefore allowed.

Déjà vu

The judge said he was concerned that the case was “materially identical” to the 2016 FTT case of Doran Bros, where HMRC challenged input tax recovery on a fee for advice as to how to reward its sole employee with the least possible liability to tax and NICs.  The taxpayer won that case, which was not appealed by HMRC.  Although Judge Gillett was not bound by another FTT decision, he pointed out that convention dictated that he should treat it as highly persuasive unless he believed it to be clearly wrong.

He said he did not believe the Doran decision to be wrong and “given that the present appeal also concerns advice given to a taxable person as to how it can reduce its tax and NICs liabilities in rewarding one or more employees in the context of a ‘tax avoidance scheme’, the similarities are obvious.  Not surprisingly therefore I came to the same conclusion”.