Refund of input VAT in danger for holding companies?
By Steve McCrindle, Haines Watts
For many years, holding companies (HoldCo) enjoyed a degree of certainty in relation to their ability to recover VAT incurred as input tax, but there is a challenge to this position from certain EU tax authorities which is creating ambiguity. This is a current issue in the UK.
A decision taken by the European Court of Justice (ECJ) involving Polysar [C-60/90] in 1993 established that a HoldCo whose sole purpose was to hold shares in other bodies, without any involvement in the management of those bodies, was not a taxable person and had no right to deduct input tax. Conversely, if a HoldCo held shares in other bodies, with involvement in the management of those bodies, i.e. it made management charges, it was a taxable person and had the right to deduct input tax.
In the UK, if the HoldCo only intended to hold shares in other bodies, it was generally registered as a member of a VAT group registration with its subsidiaries. The VAT group, a single taxable person, generally met the requirement to make taxable supplies via the trading activity of its subsidiaries and was therefore entitled to deduct input tax.
This status was effective with most (tax) planning involving HoldCo structures, as they were VAT efficient.
The passive activity of a HoldCo solely holding shares in other undertakings, and not leading to taxable supplies in its own right, appears to have been accepted in Polysar as an economic activity. This principle received support in the 2005 ECJ decision involving Kretztechnik [C-465/03]. As part of the decision, the ECJ decided that a taxable person could deduct input tax: “for the various supplies acquired by him in connection with a share issue, provided that all transactions undertaken by the taxable person in the context of his economic activity constitute taxed transactions.”
In British Airport Authority (BAA) ( EWCA Civ 112), the UK Court of Appeal recently held that the BAA VAT group could not deduct VAT incurred on the costs of an acquisition as when Airport Development and Investments Ltd (ADIL) incurred the VAT:
- it was merely intending to take over BAA by acquiring shares in the company and not carrying on economic activity, and
- there was no direct and immediate link between the services received by ADIL and the taxable supplies made by the BAA VAT group.
It was found that ADIL did not make, nor intend to make, taxable supplies of goods/services at the time the VAT was incurred. Acquiring the shares had economic consequences, but it did not mean ADIL was engaged in economic activity for VAT purposes.
This is a huge departure from the principle(s) established in Polysar and Kretztechnik, and one that now results in a VAT loss. Two similar German cases, Larentia and Minerva, as well as others (C-108/14 and C-109/14), have been referred to the ECJ. It will be around 6 months to one year before those cases will be decided. In the meantime, do not take for granted that historically secure HoldCo structures will be VAT efficient and do consult a VAT advisor for the appropriate advice.
Readers should also be aware of the possible impact of the case involving Skandia (C-7/13) on VAT group structures.
Steve McCrindle, VAT Partner
Haines Watts, United Kingdom
T: +44 207 025 4650
Haines Watts assists clients to navigate complex issues around tax planning and structuring, growth and expansion plans, with securing funding, managing succession and harnessing opportunities. Our commercial focus and practical approach ensures we help our clients build profitable businesses and realise their ambitions. Visit us at www.hwca.com.
Steve is a VAT Partner at Haines Watts, a leading provider of business advice and accounting services to owner-managers operating in the UK and abroad. It has more than 60 offices throughout the UK. He is also Vice Chair of the ITPG sub-division Indirect Taxes.
published: April 2015