UK and International Tax news

FTT Decision In Holding Company VAT Reclaim Case

Wednesday 25th June 2014

The FTT has recently published its decision in a case involving VAT reclaims by a holding company which provided management services to overseas subsidiaries and also finance.

The UK holding company [Holdco] was VAT registered from October 2006.  HMRC  started to enquire into Holdco’s VAT returns in January 2009 as only repayment returns without any declared output tax had been received up until then.  From April 2009, Holdco started to invoice its subsidiaries with management charges plus VAT [prior to the changes in the rules on place of supply with effect from January 2010].

Whilst Holdco was recovering input tax on its own costs [on accountancy and audit,  raising finance, registrars’ and Stock Exchange, public relations services,  and website design],  HMRC discovered that Holdco was in fact a holding company of a trading group [with mining subsidiaries] rather than a company with a mining trade itself as per Holdco’s VAT registration application.  HMRC also found out that Holdco had not been recharging all the relevant costs to the subsidiaries, with the reason given that the subsidiaries were not in a position to reimburse Holdco for management services rendered if recharged on a full cost basis.

HMRC subsequently disallowed the input tax claims on the basis that Holdco was not undertaking an economic activity and making taxable supplies.

The FTT agreed with HMRC and noted in particular the lack of any formal agreement between Holdco and the subsidiaries, and the management charges were not paid but dealt with by book entry, were fixed retrospectively and were not based on Holdco’s actual costs but on the subsidiaries ability to pay. In addition, there was no loan agreement or other evidence as to the terms of the provision of finance.

The tribunal judge did however give the taxpayer the right to appeal.

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