T & C Bainbridge Farming Partnership
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 June 2020 |
| Neutral Citation | [2020] UKFTT 275 (TC) |
| Date | 26 June 2020 |
| Court | First-tier Tribunal (Tax Chamber) |
[2020] UKFTT 275 (TC)
Judge Christopher Staker
Colin Bainbridge appeared for the appellant
Margaret Nkonde, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Value added tax – Input tax – Fees for legal services in pursuing litigation – Whether services used for the purposes of the business.
The FTT concluded that input tax incurred on legal fees was not recoverable as the expense had not been incurred in the course of the farming business. The fees concerned litigation to rescind the transfer of faming land owned by the partners individually into a discretionary trust, the recission was requested to avoid unexpected capital gains tax liabilities for the partners.
The appellant is a partnership comprising a grandfather, father and son which operated a farming business. The farmland consisted of three plots owned individually by each partner. The partners were concerned that, in the event of one of their deaths, that partner's land could be subject to claim by other family members. In order to protect the land it was decided that the three plots should be transferred into a discretionary trust.
The partners had not realised that transferring the land to the discretionary trust would result in a significant capital gains tax liability. When this was discovered legal proceedings at the High Court were instituted in order to rescind the transfers. The legal proceedings were complex because some of the land had been sold by the trustees and new land purchased. However, the High Court granted the recission requested.
The partnership claimed the VAT incurred on the legal fees associated with the litigation as input tax. HRMC refused the claim and the partnership appealed this decision.
Input tax is claimable under s. 24(1) of VATA if it is incurred on an expense “used in any business carried on [by the claimant]”. The FTT (paras 16–18) referred back to leading authorities on the recovery of VAT incurred on legal fees. It reminded itself there must be a “direct and immediate link” between the expenditure and either a supply made by the business or its economic activities as a whole (Praesto Consulting UK Ltd v R & C Commrs [2019] BVC 12) and that there must be a “real connection or nexus” between the two, it is not sufficient for the expense to merely benefit the business (C & E Commrs v Rosner [1994] BVC 31).
The FTT agreed with HMRC that the legal expenses had not been incurred in the course or furtherance of the partnership's business. The appellant's appeal was therefore dismissed.
The FTT reviewed the details of the legal action and noted that the land was not an asset of the partnership, it was owned by the partners as individuals and there was no partnership agreement governing what would happen in the event of their deaths. This was the reason the discretionary trust was needed. Further, the recission of the transfers of the land to the trust was undertaken to avoid a capital gains tax liability that “had no real connection with the [farming] business” (para. 41).
Although the land at the centre of the legal proceedings in this case was used for the purposes of a farming business, the plots were each owned by the partners in a personal capacity and the purpose of the litigation was to avoid personal capital gains tax liabilities. Any benefit to the farming business as a result of the litigation was incidental and therefore the “direct and immediate link” necessary for the input tax to be recoverable was not present.
[1] The Appellant partnership appeals against a decision of HMRC dated 16 February 2018 refusing to allow an input tax credit requested by the Appellant. The input tax in question is the VAT on fees for legal services incurred in bringing legal proceedings in the High Court to rescind certain transfers of land to a discretionary trust.
[2] The Appellant is a partnership. Its principal business activity is farming.
[3] In 2011, the partners were Tom Bainbridge, his son Colin Bainbridge, and Colin Bainbridge's son Peter Bainbridge. At that time, the partnership was farming three separate pieces of land. The original core land of the farm was vested in Tom Bainbridge. The registered owner of another plot was Colin Bainbridge, and a third plot was registered to Tom Bainbridge and Colin Bainbridge.
[4] In 2011, the three plots of land were moved into a discretionary trust. Title to the properties was accordingly transferred to the trustees of this new trust. The Appellant says that this was done to ensure that all of the land would remain available to the farming business: Tom Bainbridge was at the time elderly and in poor health, and there were concerns that claims on the land might be made by other family members following his death. At the time that the discretionary trust was established, it was believed by the Bainbridges that no capital gains tax (CGT) would be payable on this transaction. However, they subsequently found out that this was incorrect, and that the arrangement gave rise to CGT liability that, in the words of Colin Bainbridge, was “crushing”.
[5] Upon realising the true CGT implications, proceedings were brought successfully in the Chancery Division of the High Court to rescind the transfers of the properties to the trustees of the discretionary trust, and to rescind the discretionary trust. The claimants in those High Court proceedings were Tom Bainbridge and Colin Bainbridge, the previous owners of the land who had made the transfers to the discretionary trust. The only named defendant in those proceedings was Peter Bainbridge, who was one of the trustees of the discretionary trust. Two judgments were given in those proceedings by Master Matthews. The first was given on 25 September 2015, in which the transfer of the original core land of the farm was rescinded. There is no official transcript of this judgment, and the papers for the present appeal include only an unofficial note of the judgment taken by the parties' solicitor. The second judgment was given on 22 April 2016, in which the transfer of the other two plots of land was rescinded. The official transcript of this latter judgment is Bainbridge v Bainbridge [2016] EWHC 898 (Ch).
[6] On 1 November 2015, in the period between these two judgments, Tom Bainbridge passed away.
[7] There were some additional complications dealt with in the April 2016 judgment. The two plots of land dealt with in that judgment had in fact been sold by the trustees of the discretionary trust in February 2013. The sale proceeds had been used by the trustees to buy new plots of land. It was argued that the new land substantially represented the original two plots and that the court should make an order “restoring” the new land to the owners of the original properties. The judgment found that Tom Bainbridge and Colin Bainbridge were entitled to share the beneficial ownership of the new land in proportion to their interests in the original land. In fact, by a codicil to his will made in 2014, Tom Bainbridge had left all his 2 interest in the farming business to Colin Bainbridge, so that ultimately Colin Bainbridge became the sole registered owner of this land.
[8] The April 2016 judgment did not deal with the tax consequences of the recission. It stated at [40] that the tax issues “must be for the parties and HMRC (and in default of agreement the appropriate tax tribunal) to resolve” (see also at [19]). However, it appears to be common ground that as a result of the High Court judgments, no CGT became payable.
[9] The High Court granted the equitable remedy of recission on grounds of mistake, finding that a “causative and basic unilateral mistake” had been made by both claimants when transferring the properties to the discretionary trust, namely the mistaken belief that no CGT would be payable on the transaction. The claimants contended that they had been advised by their then solicitors that no CGT would be payable. However, the 22 April 2016 judgment makes no finding in this respect and notes at [3] that “The solicitors were and are not party to the claim, and they have not been heard, either in the original or the amended claim. But certainly in correspondence they denied both giving the advice and liability at all”.
[10] In a letter to HMRC dated 29 June 2017, the Appellant's agent requested that the Appellant be repaid the VAT that it had paid on the legal fees incurred in connection with those High Court proceedings. The letter stated as follows. The Appellant had not claimed the input tax in its quarterly VAT returns. However, the agent had advised the Appellant that the VAT was recoverable. Solicitors previously acting for the...
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