On 20 April 2017, HMRC published revised guidance on the extent to which holding companies may deduct input tax on costs incurred in acquiring, holding and managing subsidiaries. HMRC’s review of its policy was instigated by the decision in Larentia + Minerva & others1 . The changes have been made to HMRC’s Input Tax manual.

The updated guidance clarifies that in order for a company to recover input VAT on its costs it must:

• be the recipient of the supply

• undertake a business activity for the purposes of VAT

• be VAT registered/registerable at the time the cost was incurred

• have paid for it

• the cost must have a direct and immediate link to the taxable supplies.

Other changes include HMRC dropping its policy of requiring:

• input tax on acquisition related costs to be apportioned between the non-economic activity of holding the shares in the subsidiary and the economic activity of providing taxable services to the subsidiary

• the recoupment of acquisition costs, through charges for services, within a reasonable period.

The revisions are generally welcome and should assist in reducing disputes with HMRC in this area.

A copy of the revised guidance is available to view here.