In African Consolidated Resources plc v HMRC6, the FTT (Judge Rachel Short and Mr Christopher Jenkins) accepted that there was consideration for management services, but concluded that there was a lack of an economic link between the consideration and the relevant management services provided which meant that there was no taxable supply.
In the course of its business, African Consolidated Resources plc (Consolidated) provided informal debt funding to numerous overseas subsidiaries. It also provided management services to one of these overseas subsidiaries. The loans provided were not documented and had no fixed repayment dates, although they were expressed to be repayable on demand and interest bearing. The management services provided were invoiced as “consultancy fees” with little transparency on what the services in fact entailed.
Consolidated was originally registered for VAT from approximately April 2005 to February 2010 and, in its application for registration, described itself as “a holding company for mineral exploitation in Africa”. It applied for re-registration for VAT in November 2011 and this time described itself as “acting as a holding company for mineral exploration subsidiaries in Africa and providing services and finances to such companies”. HMRC refused the request for re-registration and also disputed various VAT claims made during Consolidated’s previous period of VAT registration (April 2005 to February 2010).
The question for the FTT to determine was whether the loan financing and management services provided by Consolidated amounted to an economic activity or the making of taxable supplies allowing it to be treated as a taxable person eligible to be registered for VAT in the UK and able to re-claim input tax attributable to the making of taxable supplies.
The FTT held that Consolidated did not make taxable supplies principally for the following reasons:
- The lending was not undertaken as an economic activity. The FTT gave particular weight to the apparent lack of (a) a defined repayment date for the loans made, and (b) a proper assessment at the outset and on an on-going basis of the appropriateness of the interest rate. In the FTT’s view, Consolidated’s activities in this regard were more closely aligned with those of an equity investor, which would not amount to economic activity for VAT purposes, rather than a commercial lender
- Although the management services provided by Consolidated to its subsidiary could be treated as an economic activity, they could not be treated as a taxable supply because of a lack of an economic link between the management services provided and the consideration provided in return for those services. The FTT held that the management fees charged were essentially fixed fees based on what the subsidiary could afford, rather than a commercial assessment of the value of the services being provided
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