The Upper Tribunal has now delivered the much-awaited decision in Commissioners for HMRC v BAA Limited.

The Upper Tribunal has reversed the First Tier Tribunal's decision, which found in favour of BAA. Consequently, the VAT incurred by the company now known as BAA Limited ('Bidco') on advisors' fees in connection with the takeover of the BAA plc group in 2006 has been declared irrecoverable.

Following the judgment, however, other taxpayers may now find it easier to recover input VAT incurred on fees paid in the context of takeovers and similar transactions. Although the Upper Tribunal has denied BAA recovery, it nevertheless confirmed that Bidco did carry on an "economic activity" for VAT purposes, a key point that was hotly contested by HMRC. BAA's inability to recover arose from certain factual findings which may not be present in other cases. Thus, it is possible that, on the basis of the principles established by the Upper Tribunal, other notable appeals relating to VAT on takeover fees, which have been stood over pending the decision in the case of BAA, may have a different outcome.

In particular, the Upper Tribunal's suggestion that the fees incurred by Bidco related mainly to the acquisition itself and not to the post-acquisition business and operation of the acquired group appears to have been important in causing BAA to fail. The decision therefore reinforces the need to review carefully the entirety of the commercial arrangements in relation to a takeover bid, including future business plans should the bid succeed, when considering the nature and purpose of the services received by an acquisition vehicle from its advisors on which VAT is incurred. In the absence of a factual finding that Bidco had intended to join the VAT group from the outset, the Upper Tribunal denied the recovery of VAT. The judgment highlights how fact-sensitive the question of input tax recovery in this area can be. 

Herbert Smith LLP represented BAA before the First Tier Tribunal and the Upper Tribunal.


BAA was acquired in spring 2006 by a company set up for the purpose of making the acquisition (Bidco) by a consortium led by the Spanish infrastructure group Ferrovial.

Following the takeover, Bidco joined the BAA VAT group and the group's representative member sought to recover the VAT incurred on fees paid by Bidco to its various professional advisors in connection with the takeover. HMRC refused the recovery and BAA appealed the decision.

HMRC's appeal against the First Tier Tribunal decision was heard in March 2011. As noted above, the decision of the Upper Tribunal reverses the judgment of the First Tier Tribunal.

The First Tier Tribunal held that VAT incurred on professional fees by a bidder in the context of a takeover offer was recoverable on the basis that Bidco carried on an economic activity, and further, that the input VAT incurred by Bidco in connection with the takeover, was 'directly and immediately' attributable to the general overheads of the acquired group. These two points were significant because (i) it is a basic principle of VAT law that a person should be able to recover the input VAT he incurs in the course of undertaking economic activities, and (ii) in order to recover any input VAT, the supplies upon which VAT is charged need to be attributable to the economic activities. The latter point is where BAA's argument failed on the facts according to the Upper Tribunal.

The Upper Tribunal decision

As noted, the First Tier Tribunal concluded that the VAT incurred by Bidco was recoverable by the representative member of the BAA VAT group. This was on the basis that Bidco was found to carry on an 'economic activity' from the moment it was incorporated, and despite the fact that it never made taxable supplies itself (ie supplies on which VAT is charged). The First Tier Tribunal found that Bidco's activities went beyond the mere acquisition and holding of shares: by way of example the First Tier Tribunal held that, on the evidence before it, the fees incurred were attributable to Bidco's negotiation and arrangement of finance for the benefit of the operations of the BAA group (as well as for the acquisition of the group).

Despite not making taxable supplies in its own name and having no intention to do so, the First Tier Tribunal considered that recent European Court of Justice ('ECJ') decisions allowed consideration of the intention to make taxable supplies by reference not just to the person incurring the VAT (here Bidco) but also, in this case, another person (the BAA VAT group) with whom Bidco became grouped for VAT purposes. In these circumstances there was a 'direct and immediate' link between the input VAT incurred by Bidco and the output VAT charged by the representative member of the BAA VAT group.

The First Tier Tribunal consequently held that the input VAT was recoverable as part of the general overheads of the representative member of the group. In reaching this conclusion, the Tribunal extended to the facts of this case the principle set out by the ECJ that a person may recover input VAT by reference to the supplies made by another person, on the basis that the 'fundamental principle of fiscal neutrality' required it.

Like the First Tier Tribunal, the Upper Tribunal was content that Bidco did carry on an 'economic activity' for VAT purposes, on the grounds that Bidco's acquisition of BAA was not an end in itself, but was rather the first step of an onwards investment, which involved management. Contrary to HMRC's submissions, the fact that Bidco did not charge consideration for any of its intra-group supplies of management following the takeover did not, therefore, preclude Bidco from having an economic activity. However, the Tribunal held that, on the facts, as the input VAT incurred by Bidco did not have a 'direct and immediate link' to the outputs of the BAA group, then, in the absence of evidence of an intention of Bidco from the outset to join the BAA VAT group, no VAT recovery would be allowed. Any continuing benefit enjoyed by the group as a result of the supplies received by Bidco was held to be too remote to provide such a 'direct and immediate link'. (The findings in this respect may be called into question given that the First Tier Tribunal had found that the input VAT incurred by Bidco was attributable not just to the acquisition but also to Bidco's negotiation and arrangement of finance for the benefit of the operations of the BAA group going forward).

The relevance to similar cases

While BAA has lost its quest for the recovery of input VAT, the decision confirms that the activities of an acquisition vehicle need not be akin to those of a passive investment company, and that an acquisition vehicle can therefore engage in an 'economic activity' (as was the case here).

This is an important point. It would appear that in the BAA case the taxpayer lost as a result of the Upper Tribunal's interpretation of the facts: (i) the absence of any intention of Bidco, at the time it incurred the VAT, to make any taxable supplies itself, (ii) the absence of a clear 'direct and immediate' link of the costs incurred by Bidco to the activities of the group, and (iii) the lack of evidence as to the intention to join the BAA VAT group at the time the VAT was incurred.

It remains to be seen whether the factual background applicable in the case of a number of notable takeovers which have raised similar VAT recovery questions (where appeals have been stood over pending the decision in the BAA case) will be sufficient to allow recovery of VAT.

So far as future takeover transactions are concerned, the fact that in principle an acquisition vehicle can be engaged in an 'economic activity' for VAT purposes is helpful and significant. If the Upper Tribunal decision stands, recovery appears to be possible in a wide range of takeovers and similar transactions, but care should be taken when structuring transactions, to maximise tax recovery.