Hedge fund – were the activities an intended trader

There has been a lot of recent tribunals on the question of trading and intention to trade and it is important to review this position before claiming relief. Other cases of a question of trading are Babylon Farm Ltd v HMRC [2021] UKUT 224 (TCC) on VAT and Valyrian Bloodstock Limited v HMRC [2022] TC08578 on the position of EIS.

The case of Hedge Fund Investment Management Ltd (TC8596) highlights the fact that there is no specified time period in the legislation between when a business registers for VAT and then makes its first taxable sale. In the case of, say, a business buying land and growing trees to sell as wood, the time gap could be 20 years or more.

Hedge Fund Investment Management Limited (HFIM) was set up to provide fund management, and research and introductory services, to HFIM Emerging Alpha Strategies Funds, which was an Irish open-ended investment company (OEIC,) and other funds. A prospectus intended to attract investment was produced but the OEIC decided to delay its publication until HFIM had resolved litigation against a company in the Seychelles. In the time that the Supreme Court of Seychelles took to rule in its favour (some five years later), HFIM had undertaken no fund management and little research or introductory activity.

Nevertheless, the First-tier Tribunal (FTT) has ruled that HFIM clearly intended to trade and should be entitled to treat VAT on costs incurred between 2015 and 2020 as relating to its business (at tinyurl.com/TX-HFIM). The Tribunal considered that the detailed and professional prospectus was powerful evidence of an intention to manage funds. Additionally, various emails and other documents showed HFIM pursuing research and introductory activities, albeit in a more limited way than it might have wanted to.

HFIM claimed that they passed all six business tests as set out in the case of Lord Fisher ([1981] STC 238) in HMRC’s guidance on business and non-business activities and had the status of an intending trader throughout the periods in question. Between May 2012 and January 2020, the company had introduced 19 potential investors to a single client but had not accounted for significant output tax on fees received.

The director of HFIM claimed that the company had two activities: investment management of hedge funds and advisory, consulting and investment research on an hourly, daily or fixed fee basis. No income had yet been generated by the first activity of investment management.

HMRC raised an assessment for adjusted VAT returns between March 2015 and June 2020 to disallow input tax claimed by HFIM, and also charged a careless penalty (FA 2007, Sch 24). The basis of the HMRC assessment was that the company had no business or economic activity and there was no link between the costs and any taxable or intended taxable supplies. The claims had not met the business purpose test specified in VATA 1994, s24. HMRC also challenged input tax claims on legal fees in relation to a dispute that started in 2009.

The FTT noted that HFIM had been regulated by the Financial Conduct Authority (FCA) since 2006 and that the evidence included sales invoices, emails about services it had offered, bank statements and customer agreements. The FTT therefore accepted that HFIM was always an intending trader at the time the input tax was claimed on VAT returns. So, to the extent that it could show that the inputs had either a direct and immediate link to the expected taxable supplies or were overhead costs, it was entitled to credit for the relevant input tax. The FTT therefore directed HFIM to send to HMRC a detailed breakdown of the costs to enable an agreement to be reached on the tax credit due.

The judge explained the position as: ‘It is our view…that this appellant has amply shown that at the time that it incurred the input tax it was intending to make future taxable supplies, and thus was an intending trader. It is clear, for many of the reasons given by Mr Patel in his evidence and subsequently in his oral and written submissions, that the appellant was carrying out a number of activities during the relevant period. His oral testimony has been supported, at almost every turn, by the documentary evidence.’

The HFIM’s appeal was therefore allowed. The most contact that advisers can have with HMRC’s VAT compliance teams will generally relate to repayment returns, in particular those early returns submitted when a business first registers and claims input tax on, say, fixed asset purchases or premises costs. It is important for the adviser to always be able to produce a bundle of evidence to HMRC to confirm what supplies will be made in the future and that a genuine business is in place.

The Tribunal considered that it did not have sufficient evidence to conclude whether all the input tax assessed by HMRC was directly linked to HFIM’s outputs (or qualified as overhead input tax). The Tribunal was not addressed on the question of whether HFIM’s supplies would have been exempt. The Tribunal therefore directed the parties to review recoverability of input tax on the basis that HFIM had been an intending trader.

Supplied by Julie Butler FCA, Founding Director of Butler & Co Alresford Limited, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735544. Email: j.butler@butler-co.co.uk, website: www.butler-co.co.uk 

Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, Butler’s Equine Tax Planning (3^rd edition) (Law Brief Publishing) and Stanley: Taxation of Farmers and Landowners (LexisNexis), and editor of Farm Tax Brief.

^{*The views expressed are the author's and not ICAEW's.}