UK and International Tax news
VAT And Holding Companies
Thursday 16th October 2014
HMRC has recently issued Revenue and Customs Brief 32 (2014) – VAT policy on holding companies – in which it has reviewed its policy following the decision of the Court of Appeal in the case of Briitish Airport Authority (BAA) ( EWCA Civ 112). [See our UK Tax News item of 28 February 2013].
In this case, Airport Development and Investments Ltd (ADIL), a UK company owned by an investment consortium, made a bid to acquire the entire issued share capital of BAA plc. During this process ADIL received supplies of services in connection with the takeover bid. The takeover bid was successful and, subsequently, ADIL joined the BAA VAT group which then sought to recover the VAT that ADIL had incurred on those services.
The CA noted that there were two conditions for the recovery of VAT. Firstly, the tax must be incurred by a taxable person in the course of an economic activity. Secondly, the goods and services on which the VAT is incurred must have a direct and immediate link with taxable supplies made by that person.
The CA held that the BAA VAT group was not entitled to recover the VAT incurred on the costs of acquisition because, when ADIL incurred the VAT, it was not carrying on an economic activity for VAT purposes, but was merely intending to takeover BAA plc by acquiring the shares in it, and there was no direct and immediate link between the services received by ADIL and the taxable supplies made by the BAA VAT group.
The CA found that ADIL did not make, nor intend to make, taxable supplies of goods or services at the time the VAT was incurred. Whilst acquiring the shares had economic consequences, that did not mean ADIL was engaged in an economic activity for VAT purposes.
The decision confirms that VAT is only recoverable where there is a direct and immediate link to taxable supplies. BAA was refused permission to appeal to the Supreme Court.
Following this decision HMRC has confirmed that there is no change in its policy although it notes that the facts in BAA related to particular circumstances and the decision did not address other commonly encountered issues relating to holding companies.
HMRC has therefore updated its guidance to set out when HMRC considers that VAT recovery may be possible and has also issued new guidance covering the following issues:
- when a shareholding is used as part of an economic activity
- when VAT may be recoverable by a holding company
- the effect of a holding company joining a VAT group
- how to treat mixed economic and non-economic activities
HMRC also notes that as the German cases of Larentia + Minerva and others (C-108/14 and C-109/14) have been referred to the CJEU. the decisions in those cases are likely to be relevant to the issues described above. HMRC has sais it will review the policy contained in the guidance in the light of the CJEU’s determination of this reference, which is expected in approximately 12 to 18 months.Contact Us