On 20 April 2017, HMRC published revised guidance on the ability of holding companies to recover input tax on acquisition, holding and management costs. This follows on from the HMRC Brief published in September 2014 (following the Court of Appeal decision in BAA plc8 ) and the ECJ decision in Larentia + Minerva9 .
The revised guidance contains some welcome developments, in particular the fact that HMRC have dropped their previously published policy of requiring acquisition costs to be “recouped” within a “sensible period of around 5 to 10 years”. According to the revised guidance, VAT on acquisition costs can be recovered provided:
• the claimant holding company is the recipient of the supply
• the claimant holding company carries on an “economic activity” (which, in the context of a holding company, could be the supply of genuine management services to its subsidiaries, for a consideration which is more than nominal)
• that economic activity involves the making of “taxable supplies”
• if the claimant holding company is part of a VAT group, it makes taxable supplies or interestbearing loans to group members and these support the making of taxable supplies by the VAT group.
Acquisition costs will need to be apportioned, for VAT recovery purposes, if only certain subsidiaries are to be actively managed by the holding company.
There is also a new paragraph on “stewardship costs”, defined by the HMRC guidance as those supplies invoiced to the holding company for convenience only, even though they are for the purposes of the wider VAT group. Group audit fees, group legal costs and regulatory compliance costs are given as examples. The revised guidance confirms that input tax incurred by the holding company on such costs shall be treated as costs of the group, rather than the holding company, for VAT recovery purposes.
It still remains important for early consideration to be given to the likely recovery of VAT on acquisition costs, and – in particular – for any management services to be supplied by a holding company to be clearly defined, priced and documented before the acquisition costs are incurred.