A recent First-tier Tribunal decision illustrates the “direct and immediate link” test.
The recent First-tier Tribunal decision in Victoria Oil & Gas plc v HMRC [2026] UKFTT 01246 (TC) provides a useful practical reminder of how VAT recovery is dependent on the identification of a direct and immediate link between the cost incurred and taxable economic activity. Labels alone are not enough. The case neatly illustrates the principles set out for input tax recovery in the Supreme Court’s decision in Hotel La Tour [2025] UKSC 46 (covered in our recent post available here).
Victoria Oil & Gas plc (VOG) was the parent company of an oil and gas group, and supplied management and administration services to companies holding oil and gas licences outside the UK. VOG had reclaimed input tax on costs recharged to two non-UK entities (referred to collectively as “GDC” in the decision), claiming that the costs had a direct and immediate link to the taxable supplies of management and administration supplied by VOG to GDC for consideration. The services made by VOG to GDC were outside the scope of UK VAT but carried a right to input tax recovery, as such services would have been taxable if supplied in the UK.
The dispute concerned whether input tax was directly and immediately linked to the supplies made to GDC, and whether VOG made only taxable supplies enabling the recovery of all its input tax. Several issues considered by the Tribunal related to the validity of the VAT assessments raised by HMRC but are not covered in this blog post. VOG’s appeal against H.M. Revenue & Custom’s (HMRC) limitation of input tax recovery was successful, but only in part.
Relevant Law
The principles for VAT input tax recovery in HMRC v Hotel La Tour were discussed at some length. Input tax is deductible if it is directly and immediately linked with taxable economic activity. That economic activity can either be a specific taxable transaction or, if there is no direct and immediate link with a specific transaction, the link can be with the taxable person’s overall business. Additionally, in a more general context relating to whether all of VOG’s supplies to subsidiaries were taxable, the Tribunal noted that a vague intention to charge subsidiaries in future may be insufficient to establish that services are supplied for consideration, following statements made by the Upper Tribunal in Norseman Gold plc v Revenue and Customs Commissioners [2016] UKUT 69 (TCC).
The Decision
The Tribunal found that costs which had been paid by VOG and which were subsequently recharged to GDC had the requisite direct and immediate link to VOG’s taxable economic activity. The evidence presented to the Tribunal demonstrated that the expenses had been incurred specifically in connection with the management, administration and operation of GDC’s business in Cameroon. These costs were therefore cost components of the services supplied to GDC for consideration. Following Hotel La Tour, the direct and immediate link between the costs and VOG’s services to GDC was present, thereby permitting the input tax incurred on those costs to be recoverable. The expenditure by VOG supported its remunerated management services; VOG’s shareholding in GDC was not a determining factor in the input tax recovery. Litigation and dispute-resolution costs were also determined by the Tribunal to have the requisite direct and immediate link with VOG’s supplies of management and administration to GDC (paragraph 83-85 of the Tribunal’s decision). The management and oversight of the disputes formed part of VOG’s services to GDC in its role as management services provider (paragraph 83). The delay in the recharging of the services by VOG did not, on this occasion, adversely affect recovery.
For general head-office and corporate legal costs, VOG failed to demonstrate entitlement to full input tax recovery. The Tribunal therefore left HMRC’s existing 12% recovery allowance undisturbed (paragraphs 92-95).
Furthermore, the Tribunal held that some of VOG’s supplies to subsidiaries were made for no consideration, and without expectation of any future remuneration to VOG. The Tribunal determined that such supplies were not an economic activity, thereby preventing VOG recovering all its input tax on the costs in dispute. VOG could not claim that the whole of its business activity was taxable with the right of full recovery. Accordingly, VOG’s could only recover input tax to the extent that the expenditure on costs was attributable to its taxable economic activity (paragraphs 96-101).
Summary
The decision is a useful navigation of input tax recovery in practice, and the application of the law on the recovery of input tax in Hotel La Tour. Particularly important in the Tribunal’s decision was whether the advisory costs incurred formed part of the cost base of VOG’s business activity (regardless of VOG’s parental relationship with its subsidiaries), and whether clear documentation supported that economic activity. The absence of a clear expectation of payment for services to other subsidiaries undermined VOG’s claim to full recovery.
The decision highlights that both service agreements and recharge arrangements need to accord with the business activities and commercial reality of the supplier’s business. VAT recovery on litigation fees and management costs was dependent on the identification of the direct and immediate link to taxable supplies, rather than commercial intention alone.
The case is a timely reminder that service agreements and recharge documentation should complement any intention to recover relevant input tax, with supporting invoices and clear allocation of shared costs. Documentation that clearly and accurately attributes costs to taxable service activities is likely to be more robust if scrutinised by HMRC.
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