There are lots of situations where a business pays for something but that doesn’t necessarily mean it can claim back input VAT on the cost. Just because a person is making a payment doesn’t give them entitlement to claim back any VAT charged on the cost. The only person who can claim that VAT back is the person who is treated as receiving the supply. Examples where this happens include-
- A tenant paying the landlord’s legal fees
- Someone buying something and paying the sellers fees, and
- An out-of-court settlement where one party agrees to pay the costs incurred by the other party.
This problem of deciding who can claim back input VAT has been variously tested in the VAT tribunal. What is now clear is that entitlement to claim input VAT rests only with the person – whether a company or an individual – who is the actual recipient of the supply. In order to be the recipient the person has to have a direct and immediate link to the supply. It is not enough to benefit in some way as a result of making the payment; that does not pass the direct and immediate link test.
This concept of needing to have a direct and immediate link has again been upheld in the recent Upper Tribunal finding against Praesto. This centred on legal proceedings against an individual but with Presto having an interest in the outcome. Unfortunately Praesto was not a party to the litigation or to the legal engagements. Nor was it named on any of the invoices on which it tried to reclaim input VAT.
The decision could well have gone in Presto’s favour had it not been for these negative factors. For example if Praesto had entered into a tripartite engagement with the legal team and therefore been named on the associated invoices as a joint recipient of the legal services.
As ever hindsight is a marvellous thing. The lesson here is to think about VAT before the underlying arrangements are agreed. Committing to pay what might be seen as somebody else’s costs could otherwise prove to be unnecessarily expensive.