© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
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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Commercial connection​
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- Commercial context relevant but commercial necessity not sufficient
"[104] We analyse these three precedents as requiring us to objectively determine whether there is a direct and immediate link between inputs and outputs by looking at the nature of the cost incurred and tracing it through and identifying in connection with which supplies the input was used. Commercial context will be relevant, but we must avoid taking a macro view of a business's operations, equating commercial or economic necessity as establishing the necessary connection. [105] In Southern Primary, despite the commercial interdependence of the three contracts, this did not mean that the onward sale of the land did not represent the exclusive use to which the purchase of the land was put. In DaP the supplies of intermediary services to the airtime service providers and the insurance company were made in parallel and objectively the marketing inputs promoted both. In ROH a two-way relationship between staged events and catering in an integrated customer experience was insufficient to establish a link between production costs and catering but could have been sufficient for other heads of cost i.e. marketing, as referred to by the Court." (Littlewoods Limited v. HMRC [2025] UKFTT 1602 (TC), Judge Brown KC)
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- No direct link where input commercially necessary in order to secure opportunity to make output supply
"[93] We start with Southern Primary. The taxpayer in that case was involved in three related transactions: (1) the purchase of a plot of land on which it bore VAT; (2) the sale of the land to a housing association on which it did not charge VAT; and (3) a development contract with the housing association for the construction of houses on the land. The three contracts were commercially connected. The purchase and sale of the land were conditional on the granting of the development contract and the fact-finding tribunal determined that the sale of the land and the development contract were commercially a single transaction. The taxpayer sought to recover the VAT incurred on the purchase of the land as attributable, in part, to the development contract and thereby recoverable in accordance with the relevant partial exemption calculations. The Tribunal and first level appeal concluded that the input tax was attributable to the development contract.
[94] HMRC challenged the decision on attribution contending that such a conclusion impermissibly (a) focused on the taxpayer's overall commercial aim; (b) treated the supply of the land and the development contract as if they were one supply; (c) elided the question of commercial connection with the question of attribution; (d) considered there to be a direct and immediate link where an input enabled a taxable supply; and (e) failed to appreciate that the taxpayer's use of the land was exhausted on its sale and the land could not thereafter be attributed to construction works carried out thereafter.
[95] The Court of Appeal concluded that whilst the land purchase was necessary to make performance of the development contract commercially possible that was not the relevant test which focused on the direct and immediate link between the VAT incurred on the purchase and the taxable supply of development services. The direct and immediate link requires more than a "but for" relationship between the cost and the taxable supply. The development contract was carried out on the land purchased; the ownership of the land ultimately made no difference to the works carried out under the development contract. Viewed transaction by transaction the land purchase was exclusively attributed to the onward sale of the land by way of an exempt supply." (Littlewoods Limited v. HMRC [2025] UKFTT 1602 (TC), Judge Brown KC)
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- Fact that business predicated on offering products on credit does not mean that costs relating to marketing products have direct link with credit supplies
"[135] Thus whilst we accept that the Appellant's business in this case is one predicated on offering flexible payment options some (but not a majority) of which result in the exempt supply of credit with such exempt credit thereby facilitating sales and sales facilitating the provision of credit, we do not consider that that is enough to establish a direct and immediate link between the Photographs or the associated Costs." (Littlewoods Limited v. HMRC [2025] UKFTT 1602 (TC), Judge Brown KC)
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IMMEDIATE​
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- Need not be the closest link
"[74] As to Mr Anderson's submissions directed at the factual relationship between the insurance intermediary services and the taxable supplies made by DaP (and in particular his submissions regarding timing), it is important to bear in mind that (as the Advocate-General observed in Abbey National (see paragraph 29 above)) a 'direct and immediate link' may exist between the marketing and advertising costs and the insurance intermediary services despite the fact that there may be an even closer link between those costs and DaP's taxable supplies. In other words, the quest is not for the closest link, but for a sufficient link." (Dial-a-phone Ltd v. CCE [2004] EWCA Civ 603, Parker LJ)
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"[97] DaP concerned VAT incurred on the placing of adverts in the national press, leaflet distribution, direct response TV, the internet and other sources. The taxpayer's business was the marketing of mobile phone handsets and airtime contacts, accessories and associated services including insurance. Income was earned from the mobile service providers and the insurance companies to whom the taxpayer introduced customers through its activities. The adverts placed prompted customers to contact the taxpayer. Such customers would sign up to an airtime service contract. Having so agreed, the customers were offered free insurance for three months if they agreed to sign a direct debit for continued insurance. The insurance contract could be cancelled within the 3-month period. If it was cancelled, no insurance commission was earned.
[98] The taxpayer contended that it should be entitled to recover the VAT incurred on the marketing costs in full because the cost of the adverts was attributed first to the airtime service commission earned when the taxpayer successfully introduced a customer making contact as a consequence of the marketing. It was contended that the insurance commission was earned only indirectly and in consequence of the customer agreeing to proceed with the contracting for the use of the phone and network charges. Further, the insurance commission could only ever be earned three months after the airtime contract was entered and only if the customer did not cancel in the free period.
[99] The Court of Appeal determined that DaP had effected an introduction to the insurance company upon the signing of the direct debit and was entitled to earn a commission and a share of profits in respect of customers who continued beyond the free insurance period. On that basis, the Court considered it indisputable that marketing material which, where relevant, referred to the free insurance, was attributed to both the taxable and exempt supplies made. Whilst the airtime service commission was more closely linked to the marketing costs, there was a sufficient link to the insurance commission particularly given the importance of the insurance commission economically and commercially. Arguments that the commercial connection was akin to that in Southern Primary were rejected by the Court." (Littlewoods Limited v. HMRC [2025] UKFTT 1602 (TC), Judge Brown KC)
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USE​
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- Acquisition of buildings with intention to demolish and rebuild still intention to use for purpose of subsequent supplies
"[35] Those buildings were acquired along with the land on which they had been constructed and that land continues to be used by GVM for the purposes of its taxed transactions. In those circumstances the replacement of dilapidated structures with more modern buildings which, consequently, are used for taxable output transactions in no way breaks the direct link between, on the one hand, the input acquisition of the buildings at issue and, on the other, the economic activities carried out thereafter by the taxable person. The acquisition of those buildings and their subsequent destruction with a view to building more modern new ones can, therefore, be regarded as a series of linked transactions for the purposes of subsequent taxable transactions in the same way as the acquisition of new buildings and their direct use (see Case C‑234/11 TETS Haskovo [2012] ECR, paragraph 34)." ​(SC Gran Via Moineşti C-257/11)
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PARTICULAR TYPES OF INPUT
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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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- Advertising directly linked both to sale of phone contracts and insurance commissions
"[75] It follows that it matters not that the insurance intermediary services may be viewed as being in a commercial sense secondary to the making of the taxable supplies, or even that they may be provided only after a taxable supply has been made, provided that a sufficient 'direct and immediate link' exists between them and the marketing and advertising costs.
[76] In any event, however, I reject Mr Anderson's submissions that from DaP's point of view the provision of insurance intermediary services was secondary to the making of taxable supplies; and that in terms of timing such services were only provided after a taxable supply had been made.
[77] As to the suggested 'secondary' nature of the insurance intermediary services, DaP's entitlement to commission under the Heads of Agreement between DaP and Cornhill represented a substantial proportion of its income during the relevant period. Insurance with Cornhill was part of the package of services advertised by DaP. To my mind, the fact that the advertisements referred only to the intial free three-month period of insurance is hardly surprising, and says nothing as to the relative importance to DaP of the insurance element of the package as compared with the making of taxable supplies." (Dial-a-phone Ltd v. CCE [2004] EWCA Civ 603, Parker LJ)
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- Advert that does not mention ancillary service of business not objectively attributable to that service
"[109] The analysis in Skipton demonstrates that objectively assessed use is critical. An advert which does not refer to mortgage broking cannot be said to market such services and be attributed to them in the context of a business predominantly as an estate agent offering additional connected services.
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[126] The Tribunal [in Sofology] concluded that insurance transactions were economically significant for the taxpayer and that there was a substantial economic connection between the adverts resulting in the clicks and the insurance intermediary supplies. The supplies of the sofas were closely connected to the supplies of insurance, but the Tribunal determined that, however strong these connections, there was only an indirect link between an advert which did not reference insurance and the supply of insurance intermediary services." (Littlewoods Limited v. HMRC [2025] UKFTT 1602 (TC), Judge Brown KC)
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- Symbiotic relationship between supplies of product and supplies of credit not sufficient where marketing does not mention supply
"[138] The Photographs do not mention or promote the credit/insurance services and, as already determined, the symbiotic relation between the sale of the goods and credit where it is taken is not enough on its own to establish a direct and immediate link to the credit transactions.
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[142] When we consider the Costs, there is no immediate connection to interest bearing credit. Even for a customer that can only afford to buy the product over an extended period thereby requiring them to take interest-bearing credit, the Photographs do no more than inform the customer about the product depicted triggering a curiosity of how the purchase might be funded. The information facilitating a decision as to which payment option to take is provided discretely alongside the Photographs, and, if more information about those options is required, the Photographs are obliterated or partly obscured by the provision of that information.
[143] Using the Photographs on a website or in a catalogue that also refers to credit/insurance does not consume the inputs in the way identified in Southern Primary because the website is not a supply.
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[146] We consider each use made of the Photographs to be exclusively in the making of taxable supplies of retail goods. Any link to credit or insurance is, in our view, at the most, indirect but given the nature of the Costs probably non-existent." (Littlewoods Limited v. HMRC [2025] UKFTT 1602 (TC), Judge Brown KC)
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