Input tax on purchase of stock from related company

The taxpayer was a property developer. It agreed with LAPM Ltd to buy LAPM’s stock to discharge a debt it owed the taxpayer. The taxpayer claimed input tax for the price of the goods including VAT. It then sold the stock to another business.

HMRC disallowed the claim on the basis that the invoice was unpaid after six months. VATA 1994 s 26A requires consideration to be paid within six months after the date of supply. There was further no loan agreement between LAPM and the taxpayer which would treat the loan reduction as a payment. The taxpayer claimed that the debt reduction was evidence of payment.

The situation was complicated by the fact that there was no purchase invoice from LAPM to support the input tax claimed even though the accountant acting for the taxpayer said it would have been issued at the time...