VAT: Partial exemption input tax attribution. The Littlewoods case

In the Littlewoods Limited First-tier Tribunal (FTT) case the issue was the ability to recover input tax incurred on photography costs.

Littlewoods used photographers for the creation of product specific photographs for use in catalogues and in connection with its online retail store. It made claims to recover this input tax, but HMRC refused a full refund. This appeal was against that decision.

The appellant is partly exempt. It makes taxable sales of goods and also makes exempt supplies of finance and insurance. This means that it is unable to recover all input tax it incurs.

The appellant argued that the photography costs were directly attributable to the sale of the products photographed and was consequently fully recoverable.

HMRC contended that not all of the VAT was claimable because an element was referable to the exempt supplies (ie: the input tax was incurred to support both the online taxable sale of goods and of exempt finance). Therefore, an apportionment was required.

The appeal was allowed.

The Tribunal considered that each use made of the photographs to be exclusively in the making of taxable supplies of retail goods. Any link to credit or insurance was, in its view, at the most, indirect but, given the nature of the costs, probably non-existent. Consequently, the photography did not promote any finance or insurance products so that no restriction of the input tax claims was required.

Yet another case on input tax attribution. As someone once said; partial exemption is more of an art than a science…

The judge distinguished this appeal from the N Brown case as the circumstances were different and that the court applied the wrong legal test in terms of the micro/macro level of business per the Royal Opera House case.