Tax advisers owe a debt of gratitude to the Bainbridges. Having previously (in Bainbridge & Anor v Bainbridge [2016] EWHC 898 (Ch)) clarified the law on rescission, the family has now (in T & C Bainbridge Farming Partnership v HMRC [2020] UKFTT 275 (TC)) elucidated the law on deductibility of VAT input tax on the expenses of seeking rescission. Or possibly not…
The story starts in 2011. Tom Bainbridge, his son Colin and grandson Peter farmed together in partnership. They seem to have had concerns about possible claims from other family members in respect of the land they farmed, of which some was held in Tom’s name, some in Colin’s and some jointly.
To address those concerns, they transferred the land to a discretionary trust, in the belief that they could do so without precipitating a charge to Capital Gains Tax (‘CGT’). When they found that that belief was mistaken, they sought an order to rescind the transfer, which was duly granted in 2016.
The 2016 case gives a helpful summary of the law on rescission and its effect on the tax position, including on the complications resulting from the fact that the land transferred to the trust had since been disposed of by the trustees.
Pursuit of the 2016 case necessitated payment of substantial legal fees. The 2020 case was thus about the recovery (or not) as input tax of the VAT charged on them.
It is established law that the fact that a business will in some way benefit from some particular expenditure does not of itself give title to deduct the related VAT. ‘There must be a real connection, or nexus, between the expenditure and the business that is directly referable to what the business is in fact doing.’
The Tribunal held that VAT was not recoverable, finding that ‘the purpose of the discretionary trust was to ensure that the beneficiaries of the discretionary trust would have a beneficial interest in Tom Bainbridge’s land after his death, at a time when it would otherwise no longer have been a partnership asset’.
That finding might or might not be true: but surely it is not relevant? If the VAT in dispute had been that charged on the costs of establishing the trust and transferring the land to it, the purpose of the taxpayers in establishing the trust would no doubt have been highly relevant. But it wasn’t: the case was about VAT on the legal fees in connection with the rescission.
Since the only reason for the rescission was to avoid payment of CGT that had unexpectedly become payable as a result of the disposal of partnership land, the right question to ask is: where the purpose of expenditure is to mitigate tax, to what extent can VAT can be recovered in respect of that expenditure? Surprisingly, there is little case law on the subject, and what there is is somewhat equivocal.
Dare we hope that the Bainbridges will complete their hat-trick of assistance to tax advisers by appealing to the Upper Tribunal which might, we hope, address the right question?
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This article was republished in TAXline (September 2020) and is available on the ICAEW website to ICAEW members.