A key issue for holding companies is whether and to what extent a holding company is entitled to recover VAT on acquisition costs. HMRC have previously adopted a strict approach to this issue, setting out a number of requirements that must be satisfied before recovery will be granted. Following recent decisions of the CJEU, HMRC have revised their policy to loosen these requirements.
Following a Court of Appeal decision with respect to the ability of a holding company to recover VAT incurred on acquisition costs, HMRC issued guidance which imposed several restrictions on recovery. Notably, HMRC required holding companies that provided management services to their subsidiaries to apportion VAT on acquisition costs between the economic activity of providing services and the non-economic activity of holding shares. HMRC also required a holding company to recover from the subsidiaries the entirety of the VAT which it sought to recover, over a "reasonable period of time".
The decision of the CJEU in Larentia v. Minerva gave rise to expectations that HMRC would be required to revise their guidance. The CJEU did not require reimbursement of the entirety of the input tax incurred, or for holding companies to apportion VAT between taxable services and non-economic holding of shares: rather, the input VAT forms part of the company's general expenditure and is deductible subject to any partial exemption restriction. Following the further decision of the CJEU in Magyar, HMRC has now released its updated guidance.
Revised HMRC position
HMRC's updated guidance provides that a holding company may deduct VAT incurred on acquisition costs where the following conditions are satisfied:
- The holding company making the claim must be the recipient of the supply.
- The holding company must be undertaking economic activity for VAT purposes.
- The economic activity must involve the making of taxable supplies.
- If the holding company is grouped with its subsidiaries, it makes taxable supplies or loans for which it earns interest and the loans support the making of taxable supplies by the VAT group.
HMRC now accepts that a holding company that makes or intends to make supplies of management services for consideration to its subsidiaries should be treated as carrying on an economic activity, with no requirement to apportion the VAT on acquisition costs between that economic activity and the holding of shares. Apportionment is only required if the holding company provide services to some of its subsidiaries but not to others.
Where management services are provided on contingent terms (payable only if the subsidiary becomes profitable, for instance), HMRC's view is that this does not constitute an economic activity because the necessary reciprocity between the obligations of the holding company and of the subsidiary is absent.
HMRC consider that if a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company, the acquisition costs can be deducted even if management charges are not made.
HMRC has also dropped the requirement for the VAT to be recovered over a reasonable period of time, provided that the management services are genuine and provided for consideration which us more than nominal.
Where the holding company joins a VAT group, this does not automatically give rise to an entitlement to recover VAT, or create a direct and immediate link between the holding company's inputs and the taxable outputs of the group as a whole. It remains necessary to identify a link through the intra-group (disregarded) supplies, or to evidence that the input costs are properly and naturally attributable to the VAT group's taxable outputs. Stewardship costs, such as audit fees, regulatory compliance and group legal costs, should nevertheless be treated as a cost of the VAT group as a whole, rather than a cost of the holding company.