Praesto Consulting UK Ltd v HM Revenue and Customs, [2019] EWCA Civ 353

Mr Ranson, a former employee of an information technology consultancy (“CSP”), resigned to set up a competing company ("Praesto"), where he was joined by three other former employees of CSP. CSP commenced action only against Mr Ranson and the other three employees, alleging breach of the terms of his employment and/or fiduciary duties in setting up Praesto and competing with CSP through Praesto, and alleged misuse of a contact list. The law firm acting in defending the CSP action (“Sintons”) addressed the eight invoices in issue to Mr Ranson alone respecting the conduct of the litigation from its commencement of proceedings up to and including the Court of Appeal (which reversed the finding below of liability of Mr Ransom). The invoices were paid by Praesto. Sintons had declined a request to address its invoices to Praesto.

The availability to Praesto of an input tax credit for the VAT included in the Sintons invoices turned on a VAT provision providing such a credit for “VAT on the supply to him [the taxable person] of any goods or services being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him.” HMRC assessed to recover the input tax credit of £79,932 claimed by Praesto.

Hamblen, LJ found no error of law in the FTT’s conclusion that the invoices related to services supplied by Sintons to Praesto, stating (at paras 37, 42, 43, and 45):

[T]here was throughout a joint retainer whereby Sintons was being instructed by and acting on behalf of both Mr Ranson and Praesto. … [B]oth Mr Ranson and Praesto would be entitled to Sintons' services and both would be jointly and severally liable for Sintons' fees. That is a legal relationship involving reciprocal performance.

… The real value of CSP's claim was an account of Praesto's profits. CSP was seeking to put Praesto out of business as its competitor. …

The FTT was satisfied and found that the litigation was effectively being brought against Mr Ranson and Praesto, even though Praesto had not been joined to the proceedings. That reflected the economic reality. It was also borne out by CSP's stated intention to join Praesto if and when Mr Ranson's liability for breach of fiduciary duty was established… .

… It may be that another tribunal might not have reached the same conclusions, but the FTT was clearly entitled to reach the conclusions which it did on the material before it.

LJ Hamblen further found that the FTT made no error of law in concluding that the services supplied by Sintons had a direct and immediate link to Praesto's taxable activities.

In a dissenting reasons, Sir Terence Etherton MR stated (at paras 86 and 88):

The personal belief of Mr Ranson and the understanding of Sintons that CSP was "attacking" Praesto, as well as Mr Ranson, and seeking to put Praesto out of business do not establish the requisite objective direct and immediate link to Praesto's economic activity as a whole. …

… The objective link between those services and the success of Praesto's business was not direct but indirect and was not immediate but consequential. It is well established that payment of costs by the taxpayer for a service provided to a third party instructed by the taxpayer, which is in the economic interests of the taxpayer, may not satisfy the objective direct and immediate link test: Airtours … ..

A key employee (Mr Ranson) of an IT consulting firm (“CSP”) left along with three other employees to set up a competing firm (“Praesto”). They were sued by CSP for breach of fiduciary duty but for tactical reasons, Praesto itself was not sued. The law firm acting for Mr Ranson (“Sintons”) addressed eight invoices to him alone, which were paid by Praesto, and Sintons declined a request to address its invoices to Praesto.

The availability to Praesto of an input tax credit for the VAT included in the Sintons invoices turned on a VAT provision providing such a credit for “VAT on the supply to him [the taxable person] of any goods or services being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him.” In finding that Praesto was entitled to such input tax credits, Hamblen, LJ stated (at paras. 42-43).

CSP was seeking to put Praesto out of business as its competitor. …

The FTT [below] was satisfied and found that the litigation was effectively being brought against Mr Ranson and Praesto, even though Praesto had not been joined to the proceedings. That reflected the economic reality. It was also borne out by CSP's stated intention to join Praesto if and when Mr Ranson's liability for breach of fiduciary duty was established… .