On 10 November 2016, the First-tier Tribunal6 allowed an appeal by a VAT group against HMRC’s refusal to allow input tax recovery on fees incurred on a management buy-out. HMRC had argued that the question of input tax recovery should be determined by looking at the activities of the actual recipient of the supplies (rather than the representative member of the VAT group).
The appellant (HPSL) was engaged in the business of wholesale distribution of domestic heating and plumbing appliances. Pursuant to a management buy-out, HPSL was acquired by a newly incorporated holding company (Holdco). HSPL and Holdco were registered as a VAT group following the buy-out, with HSPL as representative member. HSPL sought to recover input tax on professional fees supplied in connection with the buy-out (and invoiced after the VAT group had been established). HMRC refused the recovery claim on the grounds that VAT grouping should not enable VAT recovery in respect of supplies to a company (such as Holdco) that would not give rise to recovery had that company not been VAT grouped. HMRC noted that, absent the “single taxable person” created by virtue of a VAT grouping, Holdco made no taxable supplies of its own (not even intra-group management services).
The Tribunal held that, as a result of the VAT grouping, the input tax was treated as incurred by HSPL, as representative member, in the course of its economic activity. The professional services had the required “direct and immediate” link to the taxable supplies of HSPL.
HMRC is currently consulting on the UK VAT group rules. It remains to be seen whether HMRC’s stance in this case (essentially, that the VAT group single taxable person “deeming” rule should be ignored when considering VAT recovery) features in the consultation. HMRC’s argument had been that, following the Court of Appeal decision in BAA7 , no input tax recovery could be made on supplies made to a holding company that had no intention of making taxable supplies, and that merely including the holding company in a VAT group could not improve that position.
The decision can be viewed here.