When can holding companies recover VAT on purchases?

On 15 May 2017, HMRC issued their long-awaited policy relating to the recovery of VAT on purchases by holding companies.

When a business acquires a new company, it incurs costs such as legal and professional expenses in evaluating the new company, planning the acquisition and implementing it.  These costs generally carry a VAT charge which the acquiring business seeks to recover from HMRC.

It might at first appear that the test of whether input tax can be recovered is simple: the input tax is required to have a direct and immediate link to a taxable supply.  However, the issue has exercised the courts and tribunals in recent years.

In 2013, we reported a case where BAA was purchasing another company.  The holding company argued that it had provided strategic governance to the BAA group and that its purchases were directly and immediately linked to taxable supplies made by the VAT group as a whole and to the their intended supplies of management services.  The Court of Appeal found against the holding company on all counts, finding that there was no evidence of an intention to make taxable supplies.

The issue of input tax recovery was also addressed in the case of Norseman Gold plc v Revenue and Customs Commissioners [2016] UKUT 69 (4 February 2016).  The holding company considered that it had made taxable supplies, although the amount to be invoiced and the timing of any payment had not been agreed with its subsidiary.  The Upper Tribunal found against the holding company on the grounds that its fee had no direct and immediate link with the services provided by the holding company.

HMRC’s policy addresses a number of areas in determining whether input tax is recoverable:

  • Whether holding shares is part of a taxable business activity
  • Whether the holding company is the recipient of the purchase
  • Direct, continuous and necessary extension
  • The intention to make taxable supplies
  • Contingent consideration
  • Attributing purchases to taxable supplies when a holding company joins a VAT group
  • Stewardship costs in a VAT group
  • Apportioning costs used in mixed economic and non-economic activities

Of particular interest is HMRC’s policy that input tax can, in the right circumstances, be recovered even if there is no taxable supply between the purchasing business and the acquired business.  However, there are a number of unanswered questions at this point and caution should therefore be encouraged in applying this new concept.  For example:

  • Could this approach also result in the recovery of input tax incurred in setting up new subsidiaries?
  • Is it only companies to which this policy applies, or also similar circumstances for other entities such as LLPs, sole traders, etc?
  • How will HMRC test a business’ intention in acquiring shares in another business and whether it is a qualifying extension of the acquirer?

For further information and help on VAT and holding companies, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.