While the European Court has recently confirmed that holding companies can join VAT groups, it hasn’t address whether, by forming a VAT Group, a holding company can recover VAT on the costs of acquiring those subsidiaries in the first place.
So it is vitally important to make sure that VAT is taken into account when structuring a merger or takeover. A recent case involving the takeover of BAA illustrates this, the Court of Appeal rejecting the taxpayer’s claim to recover the near £7 MILLION VAT at stake.
In 2006, a Ferrovial-led consortium purchased BAA Limited, for £10bn. The bid was initially contested.
The bid involved the setting up of a new company, ADIL, to act as acquisition vehicle.
Fees were charged by investment banks and lawyers, among others, and a sizeable proportion was billed prior to completion of the takeover.
A pure holding company cannot automatically recover VAT. This is because, for VAT to be recoverable, there must be a “direct and immediate link” between the input cost and the making of onward supplies that are “taxable” for VAT purposes.
ADIL could have demonstrated such a link if there was evidence that it intended to make taxable management charges to BAA Limited. But although the takeover completed in June 2006, no management charges had been made by September 2006, when ADIL joined the BAA VAT Group.
Indeed, while the court accepted as a fact that ADIL intended to provide strategic management and direction to the BAA group once it was acquired, there was no evidence it ever intended to charge for the service.
An alternative argument, that by joining the VAT group, the VAT on ADIL’s acquisition costs was recoverable because there was a direct link to the VAT-able services provided by the BAA Group as a whole, foundered on the facts.
Firstly, many of the costs were billed prior to completion. At this stage, ADIL couldn’t have joined the VAT group, as it didn’t have control. Secondly, ADIL was dilatory in applying to join the VAT group, and it didn’t do so until some 3 months after completion. The Courts found as a fact that there was no evidence that ADIL intended to join the VAT group at the outset.
Ideally, BAA should have considered the VAT implications of all business activities and transactions at the earliest possible stage. It could then have identified the need to make management charges, documented a firm intention to make such charges, and invoiced at the appropriate time.
What the case didn’t resolve is what would have happened if the costs had not been billed until AFTER completion, and AFTER ADIL had joined the VAT group. At that time, the argument that the costs were overheads of a fully taxable VAT Group, and thus fully recoverable, would have been much stronger.
In the event, ADIL didn’t have documentary evidence that it intended to join the VAT group immediately. This was not helped by the fact that its application to join the VAT was, in any event, delayed until several months after completion.
In any case, the scope and purpose of the advisors’ work should be considered and documented. HMRC may seek to disallow VAT on costs referable to the mere passive holding of shares.