Praesto Consulting UK Ltd v HM Revenue and Customs

For VAT input-tax recovery, legal services may be supplied to a company where the evidence establishes a joint retainer with its director, even if invoices are addressed to the director and the company is not a party to the proceedings. Whether the services are used for the company’s business depends on an objective, fact-sensitive assessment of the direct and immediate link with its taxable activities. Such a link may exist where litigation against the director is effectively the first stage of proceedings targeting the company’s profits and business. Legal services for a director’s personal defence will ordinarily not qualify, but Becker was distinguishable on the facts. The decision was fact-specific and established no general rule.

Praesto appealed an assessment recovering £79,932 of VAT input tax claimed on eight invoices for legal services supplied by Sintons in defending proceedings brought against its sole director, Mr Ranson, by his former employer. The First-tier Tribunal found that the services were supplied to both Mr Ranson and Praesto and had a direct and immediate link with Praesto’s taxable activities.

The Upper Tribunal allowed HMRC’s appeal. It held that the First-tier Tribunal had failed to establish a contractual relationship with Praesto and, alternatively, that the services were not used for Praesto’s business. The central questions before the Court of Appeal were whether those conclusions involved errors of law on the facts found.

By a majority, the Court of Appeal allowed Praesto’s appeal. Hamblen LJ gave the leading judgment, with which Haddon-Cave LJ agreed. The Master of the Rolls dissented.

1. Supply of services. The First-tier Tribunal’s findings established a joint retainer. Sintons acted for both Mr Ranson and Praesto, both were clients, and all the work was undertaken on behalf of both. That created a legal relationship involving reciprocal performance. The invoices’ being addressed only to Mr Ranson did not prevent Praesto being jointly liable for the fees or establish a legal bar to recovery. The formal invoice conditions under the Principal VAT Directive did not displace the substance of the retainer. The Upper Tribunal had ignored critical findings and erred in law.
2. Direct and immediate link. The relevant test required an objective and fact-sensitive assessment of all the circumstances and the economic reality. The First-tier Tribunal was entitled to find that the proceedings were effectively brought against both Mr Ranson and Praesto. Establishing Mr Ranson’s liability was the intended first step towards a claim targeting Praesto’s profits, with a real risk that Praesto would have to account for those profits and cease trading. The legal services therefore had a direct and immediate link with Praesto’s taxable activities under the Value Added Tax Act 1994.
3. Authorities and limits. Finanzamt Koln-Nord v Becker EU:C:2013:99 was distinguishable because the company there obtained only an indirect benefit from defending its director, without linked proceedings or comparable consequences for its business. P&O Ferries provided a useful factual analogy. The decision turned on the First-tier Tribunal’s particular findings and established no general rule.
4. Dissent. Etherton MR would have dismissed the appeal. In his view, the objective supply was legal advice and representation solely for Mr Ranson’s defence, invoiced to him alone. Any possible future claim against Praesto was contingent, indirect and consequential, and did not satisfy the direct-and-immediate-link test.

1. Court of Appeal (Civil Division) — The appeal was allowed by majority: [2019] EWCA Civ 353.
2. Upper Tribunal (Tax and Chancery Chamber) — HMRC’s appeal was allowed. The Tribunal held that the First-tier Tribunal had erred on the supply issue and, alternatively, that the services lacked a direct and immediate link with Praesto’s business: [2017] UKUT 395 (TCC).
3. First-tier Tribunal — The Tribunal found that the services were supplied to Praesto and had a direct and immediate link with its taxable activities. The decision was dated 13 July 2016.