UK and International Tax news

BAA And VAT On Deal Costs

Wednesday 24th August 2011

Further to our UK Tax News Item of February 2010, the Upper Tribunal has now heard and upheld HMRC’s appeal in the case of BAA Ltd v HMRC [UT 258].  The case concerned the recovery of VAT incurred by a bidder on fees paid in connection with a succesful takeover.

In 2006 an investment consortium led by Ferrovial launched a takeover bid for BAA plc (“BAA”). The bid vehicle was a new company (“ADIL”).  Although initially contested, a revised bid was subsequently recommended by the Board of BAA plc and in July 2006 the target became a wholly owned subsidiary of ADIL. 

During 2006 ADIL incurred significant advisory fees in connection with the takeover, which  carried VAT.  In September 2006 ADIL joined the BAA VAT group.  The representative member of the VAT group then reclaimed that VAT as input tax of the group, attributable to the general overheads of the group.

HMRC disputed the input tax recovery and raised an assessment to VAT in the amount of £6.7m.  The representative member of the BAA VAT group appealed against that assessment.  HMRC had challenged the deduction claimed in respect of the VAT incurred by ADIL, on the basis that the costs incurred related to the acquisition of the BAA business as a whole.  HMRC stated that the costs of ownership were investment costs that had been incurred by ADIL in raising finance to acquire the BAA group and that there was no direct or immediate link between the supplies on which the VAT was incurred and any taxable supplies made (or to be made) by the BAA VAT group.

The First Tier Tribunal had held that the bid vehicle was involved in economic activities including strategic governance and direction of its subsidiaries after the acquisition, although it did not make any supplies for VAT purposes because it had become a member of the BAA VAT group.  Given this, and following the ECJ decision in the Faxworld case, BAA could claim the VAT in respect of the costs incurred before the acquisition.

However, the Upper Tribunal found that the costs did not have a sufficiently direct and immediate link with the taxable business of BAA group to allow recovery and that the incurred VAT was not attributable to onward taxable supplies. It also held that there was no evidence when the VAT was incurred that the bid vehicle had intended to join the VAT group in order for the VAT to be recovered. 

This decision and the final outcome of this case will have significant implications for acquisition vehicles which have claimed input VAT on their deal costs.

If you would like to discuss this case in more detail, please contact Keith Rushen on +44 (0)20 7486 2378.

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