UK and International Tax news

UT Agrees With FTT That Taxpayer Company Made Supplies For Consideration In VAT Case

Friday 4th June 2021

The Upper Tribunal has recently held that a taxpayer company was making taxable supplies for consideration in the course of an economic activity where the costs of the services were added to intercompany loan accounts.

In Commissioners for HMRC v Tower Resources PLC [2021 UKUT 123 TCC], the UT had to consider an appeal by HMRC against a decision of the FTT which held that a parent company which charges its subsidiaries for management, logistical and technical services is making a taxable supply for consideration, in the course of an economic activity, and where the cost of the services is added to intercompany loan accounts, and whilst the loans are repayable on demand, the parent company has in practice not demanded repayment.

In an April 2016 decision upheld in October 2016 following a review, HMRC considered that the appellant was not making taxable supplies for consideration to its subsidiaries. HMRC denied Tower credit for input tax totalling £1.4m in relation to VAT periods from 06/12 to 12/15.

On appeal by Tower to the FTT, HMRC maintained that Tower was not making taxable supplies for consideration or, if it was, it was not doing so in the course of an economic activity. The FTT rejected both arguments and allowed Tower’s appeal.  HMRC appealed to the UT on three grounds, being:

  • that the FTT erred by misunderstanding HMRC’s case and thereby failing to make complete findings of material fact as regards the agreement between Tower and its subsidiaries
  • that the FTT erred by holding that Tower was making supplies for consideration for the purposes of Article 2 PVD
  • that the FTT erred by holding that Tower was making supplies in the course of an economic activity for the purposes of Article 9 PVD.

The UT held that whilst Tower did not, in practice, demand repayment from its subsidiaries did not change the characterisation of its agreements with subsidiaries for the purposes of Article 2(1) PVD, in circumstances where the agreements provided for repayment to be made on demand without any contingency, and where the FTT found as a matter of fact that this reflected the economic and commercial reality of the relationship between the parties.

HMRC’s second ground of appeal failed for the same reasons as the original formulation of the first ground of appeal.  The obligation to pay was on the facts found by the FTT and, when pressed on this point at the hearing, counsel was unable to identify any basis on which the second ground of appeal could survive if the first ground of appeal was rejected.

The UT held that the involvement of a holding company in the management of its subsidiaries will be regarded as an economic activity for the purposes of Article 9(1) PVD if the management services provided by the holding company are supplied for consideration within the meaning of Article 2(1) PVD.  It added that whether or not a supplier of services is also a person who provides a loan facility to the recipient of the services is purely incidental and cannot affect the characterisation of those services as an economic activity. The provision of funding by a parent company to its subsidiaries through debt and/or equity is standard commercial practice.

It should be noted that in its VAT manual, HMRC considers that where a holding company incurs input tax on costs in providing or intending to provide management services to subsidiaries on terms whereby any payment will be contingent upon the profitability of those subsidiaries, it would treat the holding company as not engaged in economic activity.

This is another case where HMRC’s guidance has been found deficient. For Tower, it remains entitled to the recovery of input tax on its costs.

If you would like further information on this case, please contact Keith Rushen on 0207 486 2378.

Contact Us