On 25 September 2014 HMRC updated its VAT guidance in light of last year’s Court of Appeal decision on VAT recovery (BAA plc1).

Although - following the BAA decision - there is to be no change in HMRC policy, HMRC have taken the opportunity to address other “commonly encountered issues” in the context of VAT recovery for holding companies. The updated guidance provides further indicators as to when HMRC will (and will not) regard input VAT as recoverable.

Worthy of mention here is that HMRC now state that costs incurred by a holding company will have a “direct and immediate link” to taxable supplies the holding company makes (and related VAT will therefore be recoverable) provided the costs are components of the price of the taxable supplies. As such, HMRC expects the holding company to set prices in order to seek to recoup the cost of capital expenditure within a “sensible period of around five to ten years”.

The HMRC Brief announcing the guidance update notes that certain German cases have been referred to the ECJ, and that the decisions in these cases may necessitate a further review of policy in this area.

To view the HMRC Brief, click here.