The disagreement over the VAT bill forced Gray & Farrar to head to the tax courts, arguing that it should not be charged VAT on its services for the tax years 2012 through 2016.

The company runs an exclusive dating service which provides clients with introductions to potential romantic partners, hand-picked for them by an adviser rather than by automated online dating apps.

Clients sign up for a 12-month membership, which gives at least eight introductions from Gray & Farrar’s existing members, at the cost of £15,000 a year, while they can also hire the firm to track down a bespoke partner from outside its client list could cost anything from £25,000 to £140,000.

New clients were invited to an in-depth initial consultation - either with the firm’s managing partner or a trained member of staff - to gather information about them and what they were looking for in a partner.

This would include a degree of vetting and perhaps some dating coaching where appropriate. As the client began to contact and meet their matches, Gray & Farrar’s team would keep in close contact with them to discuss progress and provide further advice.

For VAT purposes, Gray & Farrar treated its service as a supply of consultancy, which meant that clients resident outside the EU were not charged UK VAT on its fees.

HMRC rejected Gray & Farrar’s attempt to adopt a zero VAT status on the services provided and this saw the company appeal at tribunal

The tax authority's argument revolved around the service provided, taking the view that Gray & Farrar used intangible skills of intuition and reading of emotions in order to find suitable matches for its clients and took the view that this was not consultancy and all of the income should have been subject to UK VAT, regardless of the clients’ location.

HMRC insisted that consultancy services should be regarded as the giving of reasoned, evidence-based intellectual advice. Gray & Farrar’s service, in HMRC’s view, did not qualify.

Gray & Farrar took the case to tribunal, which said ‘the question is whether the appellant's services were, or were similar to, the services provided by consultants or consultancy firms, or fell within "data processing and the provision of information".’ [Gray & Farrar International LLP and the Commissioners for Her Majesty’s Revenue and Customs, [2019] UKFTT 684].

Some of the argument put forward by HMRC relied on the placing of a single comma in the wording of paragraph 16(2)(d) schedule 4A Value Added Tax Act 1994 (VATA 1994), which refers to ‘services of consultants, engineers, consultancy bureaux, lawyers, accountants, and similar services, data processing and provision of information, other than services relating to land’.

HMRC said this meant data processing and the provision of information was to be read as a single composite phrase, whereas the tribunal found that it could mean two distinct activities.

The tribunal rejected HMRC’s narrow definition of consultancy, finding that it was simply expert advice based on a high degree of experience. The use of intuition and experience as a tool to pick a match for a client did meet the tests to be regarded as consultancy.

The ruling stated: ‘It seemed to us that the way in which G&F provides or creates the advice is not part of what it is providing. Although it uses intuition and experience to give advice it is not supplying the activity of using intuition and experience, rather it is merely using that as a tool to formulate the advice and to decide on the information it gives to the client.

‘The knowledge and calculations of the engineer, her questioning of the client as to the required capacity of the bridge and the text book research of the lawyer are used to make the supply to their respective clients but are not what they supply.’

The tribunal also said that the continuing contact Gray & Farrar provided to its clients differentiated its service from that of an online dating website where no support was given, and was not merely incidental to the other parts of the supply.

However, overall, the tribunal decided the case in favour of HMRC. It ruled that only the managing partner held the necessary expertise to be regarded as a consultant, and her staff simply gave the clients a listening ear and the kind of support someone might obtain from a friend, which was not consultancy. The tribunal thought that most of the client contact was handled by the staff and that the managing partner did not give sufficient input for the service of consultancy to be the predominant service.

Sarah Halsted, RSM tax director, said: ‘This was a split decision, with one member of the tribunal finding that Gray & Farrar did provide consultancy because its staff’s work was performed under the supervision of the managing partner, who gave evidence at the hearing that she met many of the clients herself and chose matches for all them, albeit sometimes based on information provided by her team.

‘It remains to be seen whether Gray & Farrar may appeal this decision, which would appear to involve large amounts of VAT. The case is a useful reminder for advisory businesses to think carefully about whether their service constitutes “consultancy” when determining the place of supply of their services to overseas clients.’

Gray & Farrar International LLP and the Commissioners for Her Majesty’s Revenue and Customs, [2019] UKFTT 684