The UK Court of Appeal has held in the case of BAA plc that VAT on a holding company's deal fees for acquiring target company shares is not recoverable. This is an important case for holding companies (often used by overseas entities seeking to acquire shares of UK companies) because it shows that recovering VAT is not an automatic right, but will depend on how the transaction is structured.
Airport Development Investments Limited ("ADIL") was established to acquire the share capital of BAA plc ("BAA"). ADIL incurred VAT on the professional and advisory services it received in respect of its takeover of BAA. Following the takeover, ADIL joined the BAA VAT group, which then tried to recover the VAT on ADIL's deal costs. The UK tax authorities ("HMRC") rejected the claim. The UK First-tier Tax Tribunal allowed BAA's claim because it attributed a link between the costs incurred by ADIL and the eventual supply made by the BAA VAT group (of which ADIL had become a member). HMRC appealed successfully, first to the Upper Tribunal and then to the Court of Appeal.
The First-tier Tribunal had found, as a matter of fact, that at the time of incurring the VAT, ADIL's only intention was to acquire and hold the shares of BAA. On the basis of that finding, the Upper Tribunal held that the BAA VAT group's taxable supplies could not be attributed to ADIL because ADIL was not a member of the BAA group at the time ADIL incurred the relevant VAT (and had no intention to join the VAT group when the costs were incurred).
The Court of Appeal has now upheld the Upper Tribunal's decision that ADIL (or the BAA VAT group) could not recover the VAT incurred because of the following:
- ADIL was not engaged in economic activity for VAT purposes (the acquiring and holding of shares does not provide the right to be registered for VAT). This meant there was no right to recover the VAT.
- Even if ADIL had been entitled to be registered for VAT, on the facts of the case, the costs incurred were not connected with any supply that ADIL made or had intended to make.
VAT on deal fees can be a significant cost in a transaction and VAT advice should be taken at an early stage to maximise the opportunities to recover VAT. If ADIL could have evidenced an intention to make taxable supplies (such as supplying management services to the other companies in the BAA group) then, at least, some of the GBP6 million of VAT incurred would have probably been recoverable.
If a holding company intends to provide management services, it will be carrying out economic activity entitling it to register for VAT, so VAT on costs related to those management services will be recoverable. It is important to understand and document the extent to which the costs incurred in any corporate transaction relate to taxable supplies (such as management services) so that the correct amount of VAT can be recovered.
It is fairly common for holding companies to try to join the VAT group of the target as soon as possible in the hope of maximising VAT recovery. Whilst this case does not directly deal with the point, it is a reminder that there is no one-size-fits-all solution and it is necessary to look at: (1) the entity which actually incurred the costs; (2) the time those costs were incurred; (3) the intention of the parties at that time; and (4) the link between the costs and outputs (if any).