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M1: General principles of input VAT recovery
DIRECT AND IMMEDIATE LINK​
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- Obligation to use fee to market a service does not create direct link between marketing costs and those fees/supplies
"[41]...We agree, applying the test in Card Protection Plan Ltd v CCE (No2) [2002] 1 AC 202, that the essential feature or dominant purpose of the agreement was to be appointed to the Appellant’s panel for the purpose of receiving referrals of clients. It was not to advertise ER products or services without more. This is clear when one reads the agreement as an objective whole. In particular, the evidence shows that the consideration payable by solicitors for appointment onto the panel is calculated by reference to the number of referrals anticipated to be made to the solicitors. We use the term SMF in this judgment because that is the term used in the solicitors’ panel appointment letter, but, as we have made clear, it can properly and more accurately be described as a referral fee.
[42] Whilst we accept that the Appellant has an obligation under the panel agreement to use its best endeavours to use not less than 75% of the SMF to promote ER products we do not think that this provides a direct and immediate link. Firstly, the Appellant’s obligation extends only to using its best endeavours and in that sense there is no binding requirement for it to use the fees for ER marketing (the only binding requirement being to use its best endeavours to do so). Secondly, and most compelling, the referral to the solicitor in relation to ER takes place once the customer has already bought or committed to buying an ER product or service from the Appellant. The direct and immediate link with the SMF exists as between the SMF and the process of referral not the disputed marketing expenditure. At the point that disputed marketing expenditure is taking place there is in no sense a promotion of the services provided by the solicitors. That comes later. Any link between the disputed marketing expenditure and the SMF is tenuous at best, at least one step removed and, therefore, not immediate or direct." (KRS Finance Ltd v. HMRC [2023] UKFTT 855 (TC), Judge Malek)
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Marketing​
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- Advertising relating to a prominent product/service directly linked to feature product/service
"[37] The marketing strategy adopted by the Appellant uses a “funnel” approach and what is described as a “hero” product approach. The “hero” product in this case is clearly the ER [equity release] product or suit of products. This strategy is grounded in the Appellant’s belief, as shown by the evidence, that its ER services provide the main emotional drivers for the purchase of the Appellant’s services by consumers. This requires the Appellant’s marketing efforts to be focussed on ER products in order to create an initial interest to, eventually, enable other services (such as EP [estate planning]) to be cross-sold. Whilst we accept that general advertising expenditure (of say a brand name) would tend to make it difficult to establish a direct link with a particular product and or service and, therefore, such expenditure would tend to be better categorised as residual overhead, the same cannot be said where the advertising expenditure in question relates to a prominent (or hero) product or service. The natural inference must be that the expenditure is directly linked to the product or service that is the feature of the advertising. The subjective motive of the advertiser (to enable cross-selling whether or not by using a “funnel approach” or increase footfall for example) seems to us to be irrelevant. The fact that the Appellant couches its argument in terms of “the objectively determined purpose” of the marketing strategy does not assist it." (KRS Finance Ltd v. HMRC [2023] UKFTT 855 (TC), Judge Malek)
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