In Heating Plumbing Supplies Limited1 , the First-tier Tribunal (FTT) allowed a VAT group’s appeal against HMRC’s denial of input tax recovery on advisory fees incurred in a management buyout.
Heating Plumbing Supplies Limited (HPSL), carried on a business of the wholesale distribution of domestic heating and plumbing appliances to trade and the public.
In November 2010, HPSL’s Board of Directors decided to look into a management led buyout. The structure adopted as the means of giving effect to the buyout was for HPSL to be acquired by a new holding company, Heating Plumbing Supplies Group Limited (HPSGL), which was owned by the management and staff. The purpose of the buyout was to enable HPSL’s employees to acquire a stake in the business.
Following the buyout, HPSL (as the representative member) and HPSGL, were registered as a VAT group. HPSL claimed an input tax deduction in respect of professional services supplied in connection with the buyout and invoiced after the VAT group had been established.
HMRC denied the input tax claimed on the professional fees. The issue was whether input tax incurred on the services provided by the advisors was recoverable. HMRC argued that joining a VAT group does not allow costs that would otherwise be irrecoverable under a single registration to be recoverable as part of the group. HMRC took the view that the buyout company had no economic activity and that, as such, it should not be entitled to reclaim the VAT charged on professional fees. HMRC cited BAA2 as authority for the proposition that costs associated with the takeover, by a holding company, of the shares in a company that itself made taxable supplies, were not costs of that underlying business. HPSL argued that it was a VAT group and that, as a ‘single taxable person’, it was entitled to reclaim the VAT in full.
The FTT allowed the appeal. It was of the view that the input tax was incurred by the HPSL VAT group in the course of an economic activity and the professional advisors services had a direct and immediate link to the taxable supplies made by the representative member (or VAT group) as they were incurred for the purposes of that economic activity.
The FTT agreed with HPSL that when a VAT group is formed, the identities of the individual members of the group disappear and there is a single taxable person for VAT purposes. Supplies of goods or services by, or to, a member of a VAT group must therefore be treated as supplies of goods by, or to, the VAT group.
The FTT distinguished BAA on the facts as HPSGL was formed for the purpose of furthering HPSL’s business by motivating staff. The FTT agreed that had the services been provided solely to facilitate the acquisition of shares with a view to receiving a dividend (as in BAA), there would have been no direct and immediate link with the taxable supplies of HPSL. However, the services were provided for the direct benefit of HPSL’s business and could be viewed as overheads.
This is an important and interesting first instance decision for businesses regarding the difficult area of VAT recovery on professional fees in relation to management buyouts where a holding company is inserted into a group structure. The FTT does, however, appear to distinguish a management buyout from a third-party takeover and it is therefore likely that in the case of a third-party takeover, the holding company will have to make taxable supplies. It will be interesting to see whether HMRC appeal this decision.
A copy of the decision can be found here.