Skatteverket v AB SKF: A new approach to VAT recovery on a share sale?
Until recently, it has generally been accepted that the VAT charged to companies in respect of most professional costs incurred in connection with a sale of shares by the holding company of a group will be an irrecoverable cost. A recent decision of the European Court of Justice (ECJ) suggests this received wisdom is wrong. Companies who either are selling or have sold shares should consider whether the VAT element of professional costs incurred is in fact recoverable from HM Revenue & Customs (HMRC).
Uncertainty over the question of whether Value Added Tax (VAT) can be recovered in the context of transactions in shares has led to a number of ECJ cases. Through the case law, it has been established that a holding company can carry on an economic activity for VAT purposes where it actively manages its subsidiaries (for example, providing management, administration and marketing services for a fee on which VAT is charged), as opposed to being a mere passive shareholder. However, the issue of when a corporate seller can recover any of the VAT incurred on a share sale has remained a difficult point.
AB SKF (SKF) was an active Swedish holding company which planned to sell two subsidiaries. It applied for a ruling as to whether or not the VAT incurred on the professional services it received in order to effect the share sale would be recoverable. The initial ruling was that the VAT was recoverable, but this was challenged by the Swedish tax authority and a referral was made to the ECJ asking whether share sales fall within the scope of VAT as an economic activity and if so, whether they are exempt. Depending on the answer to those questions, the ECJ was also asked whether the VAT incurred was recoverable.
The decision of the ECJ
The ECJ held that the sale of shares should be treated in the same way as an acquisition of shares and therefore could be an economic activity, provided the selling shareholder took an active role in the management of those companies. The ECJ went on to say (perhaps surprisingly) that the sale of shares could be treated as a transfer of a business as a going concern (TOGC) where it is the functional equivalent of a sale of assets. Where the sale is a TOGC it would be outside the scope of VAT altogether and VAT on costs could be recovered as a general overhead. The ECJ could not determine whether, in this case, the sale did amount to a TOGC (this was a decision for the Swedish courts) but unhelpfully did not provide the national courts with any guidance on this issue. As the sale of shares is within the scope of VAT (except where it is a TOGC), the ECJ quickly found that the sale of shares is an exempt supply.
The Advocate-General had stated that the exempt sale of shares had a “chain-breaking” effect and that VAT incurred in relation to an exempt supply was irrecoverable, confirming principles set out in earlier ECJ judgments. The ECJ however took a different approach and considered that it would infringe the principles of fiscal neutrality if a company which raises capital by the issue of shares, or the sale of assets as a part of a TOGC, is able to recover some or all of the costs associated as part of its general overheads, whilst a company which raises capital through an exempt disposal of assets could not. The ECJ therefore sought to distinguish previous case law, and focused on the need to identify whether the VAT incurred is taken into account as part of the cost of the share sale, or of the business as a whole. If the latter, the VAT incurred could be recoverable to the extent the business as a whole made taxable supplies. In many cases such costs will not be reflected in the price paid for the shares, and this part of the decision is taxpayer friendly, although it will be interesting to see how the national courts apply this approach.
This decision has opened up the possibility that there may be grounds for businesses recovering input VAT incurred on costs relating to the sale of shares in actively managed subsidiaries, either on the basis that the sale of shares is a TOGC or on the basis that the costs incurred by the seller are linked to the seller’s overall taxable business, as opposed to forming part of the price paid by the buyer for the shares. HMRC are currently reviewing their guidance on this issue and are not taking any further action to resolve claims at present; in the meantime, businesses who have incurred or are about to incur such costs may wish to consider making protective claims to recover the input VAT incurred. Depending on when the VAT was incurred, they should look at this as a matter of urgency, to ensure any claim is not time-barred.