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HM Revenue and Customs Brief 32/14 - VAT policy on holding companies

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Issued 24 September 2014

This Revenue and Customs brief confirms that HM Revenue and Customs (HMRC) has reviewed its policy following the decision of the Court of Appeal in the case of Briitish Airport Authority (BAA) ([2013] England and Wales Court of Appeal Civ 112). 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. For the purpose of this brief, “taxable supplies” includes supplies not charged to UK VAT, but which carry a right to input tax recovery.

Following this decision there is no change in HMRC’s policy. However the facts in BAA related to particular circumstances and the decision does 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.

The revised guidance can be found at VAT Input Tax Manual

Taxpayers should be aware that the German cases of Larentia + Minerva and others (C108/14 and c-109/14) have been referred to the Court of Justice of the European Union (CJEU). The decision in those cases is likely to be relevant to the issues described in this brief and the guidance referred to in this brief. HMRC 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.

Background

A UK company, Airport Development and Investments Ltd (ADIL), which was 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 Court of Appeal noted that there are 2 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 Court of Appeal 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 Court of Appeal found that ADIL did not make, nor intend to make, taxable supplies of goods or services at the time the VAT was incurred. Acquiring the shares had economic consequences, but that did not mean ADIL was engaged in an economic activity for VAT purposes.

New guidance covers 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

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© Crown Copyright 2014.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



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Article Published/Sorted/Amended on Scopulus 2014-09-26 12:45:10 in Tax Articles

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