Many taxpayers will remain VAT registered despite having no current VATable activities. Often, this may be due to not knowing what to do next when an activity ceases, i.e. deregistration and all that is associated with it.
The recent First-Tier Tribunal (“FTT”) ruling in the case of Compound Photonics Group Limited (“CPGL”) is an example where defending a position of being an ‘intending trader’ for VAT purposes can unravel in the absence of sufficient supporting evidence, particularly where the surrounding facts suggest a low probability of a bona fide ‘intention’.
The taxpayer, CPGL VAT group (“CPGL”), consisting of two other members, CPL and CPUK, disposed of its operating business in May 2017.
CPGL claimed VAT on costs incurred at a later date, which it believed it had a right to claim as an ‘intending trader’, between the May 2017 disposal and a later disposal of IP in 2022 which was seen as a one-off economic event, however this ‘in-between’ period was one of “economic inactivity”.
CPUS, a subsidiary sitting outside of the VAT group, was undertaking the actual R&D activity which CPGL was incorrectly claiming VAT on, and the VAT costs in question didn’t directly relate to the sale of the IP itself by the VAT group.
The interesting aspect of the case (and a fundamental risk to any business where HMRC disagrees with a position) is in the burden of proof, rather than the outcome itself.
HMRC stated that no evidence had been provided to demonstrate a direct and immediate link between the VAT claimed and CPGL’s economic activity – which put the burden onto CPGL to prove that, in the interim period, it was an intending trader (with a corresponding right to be VAT registered, and thus a preliminary right to recover any VAT costs).
Altogether, litigation could have been avoided altogether if there was sufficient tangible evidence, rather than “vague and general”.
The actual material cost to CPGL (risk which could have been planned around, or better navigated during HMRC’s enquiry and later assessment for incorrectly claiming VAT) related to the fact that CPGL had no entitlement to claim VAT incurred.
The Court’s judgement was not surprising; the result of the conclusions was that CPGL had incurred certain costs which did not relate to its economic activity (another related party undertook the economic activity which CPGL claimed to itself be undertaking).
The facts were individually and holistically ‘unhelpful’. Proper planning ensures, for example, that relevant facts are sufficiently documented – something which an experienced VAT expert would have signalled as a key risk in relation to the recovery of the VAT in question.
If you would like to discuss how these issues may affect your business, please contact Jaspal Dhillon.
