The recent Court of Appeal (CA) judgment in BAA Ltd v HMRC  EWCA Civ 112 has emphasised the importance of considering VAT recovery on advisers' fees as early as possible when setting up a new company to make an acquisition.
Facts of the case
The acquiring company (Bidco) incurred VAT in connection with its 2006 takeover of airport operator BAA plc (BAA). BAA headed up the BAA VAT group, which Bidco joined approximately three months after the takeover. BAA sought recovery of the £6.7m of VAT incurred by Bidco on the advisory fees associated with the takeover.
The CA considered the appeal by BAA against the decision of the Upper Tier Tribunal not to allow recovery of VAT on the advisers' fees.
Based on the facts as determined by the First Tier Tribunal, the CA decided that Bidco was not entitled to recover the VAT. It therefore rejected BAA's appeal for two reasons:
- When Bidco incurred VAT, it was not carrying on an 'economic activity' for VAT purposes; its intention to acquire shares in BAA had economic consequences, but was not enough to constitute an 'economic activity'. In addition, whilst Bidco always intended to provide management services to the BAA group once it was acquired, at the time it consumed the services, Bidco had no intention of charging the BAA group for its management services. The lack of evidence of an intention to make taxable supplies for consideration was fatal to the argument that Bidco was carrying on an economic activity.
- There was no "direct and immediate link" between Bidco's inputs and the BAA VAT group's outputs. The supplies made to Bidco were only in connection with the acquisition of shares, and not with any supply of management services that Bidco intended to make.
Things to consider
This is a complex and continually-evolving area of law. To maximise the chances of VAT recovery it would be prudent to take certain steps, providing objective evidence of both economic activity and a direct and immediate link to the target group's outputs:
- Register for VAT as early as possible.
- Document (in board minutes or otherwise) an intention to join or establish a VAT group with the target immediately following its acquisition.
- Ideally ensure that the acquiring company (rather than one of its shareholders) engages the relevant professionals or that the engagement is transferred to it as soon as possible.
- Once the acquisition is complete, immediately apply for group VAT membership (from the date of acquisition) and start providing and charging for management services.