There continues to be a significant number of cases coming to the courts in relation to the recovery of value added tax by holding companies. In general, the cases are showing that with careful planning, companies can protect the recovery of value added tax on costs incurred relating to refinancing, restructuring and deal transactions.
However, there are a number of instances where the facts do not fit well within guidance and case law; it is these cases which continue to be appealed and make their way through the courts.
As a result, there are regular and ongoing developments in relation to value added tax (VAT) recovery for holding companies.
The most recent of these cases concerns Ryanair Limited (C-249/17), which considered the recovery of VAT on costs incurred on an aborted takeover of Aer Lingus. In 2006, due to competition law, Ryanair’s bid failed.
Ryanair had intended to make taxable management charges to its subsidiaries, however as the bid failed, it obtained a much smaller shareholding and the intended services were not realized. The Irish tax authorities denied Ryanair input tax recovery on the costs it had incurred. This was on the grounds the acquisition and holding of shares does not constitute an economic activity.
In order to be able to achieve VAT recovery, holding companies need to demonstrate that they are a ‘‘taxable person’’ and that they are incurring VAT in relation to their economic activity. It is well established that holding companies who only derive income from dividends are passive for VAT purposes and not a taxable person.
The Advocate General (‘‘AG’’) opinion in May 2018 considered Ryanair was both a taxable person and had incurred the VAT in relation to its economic activity.
The AG suggested that Ryanair would be entitled to recover VAT where it could evidence that it intended to recharge the costs to the operating companies even if those charges did not occur.
The Decision in Ryanair Limited
While the decision of the Court of Justice of the European Union (CJEU) often follows the opinion of the AG, this is not always the case. Even where they are in agreement, the emphasis as to points they consider to be important can change.
However, here, it seems the CJEU’s decision has materially followed the AG’s opinion. The CJEU accepted that where an entity’s only objective is to acquire shares with no direct or indirect involvement in its management, this would not make them a taxable person.
However, in Ryanair’s case, it considered there was a clear intention to have a taxable activity in the form of management charges.
Further, the CJEU noted economic activity could include preparatory acts.
Therefore, a business, such as Ryanair, with the intention of starting an economic activity, and which incurs costs to do so and starts work, was still a taxable person.The CJEU then had to consider whether Ryanair had a right to deduct VAT.
It is accepted that if goods or services are used for the purpose of making a taxed transaction then VAT is recoverable.
The CJEU agreed with the AG that this right to deduct remains even if the economic activity does not occur.
The CJEU concluded that in order for the VAT to be recovered in full by Ryanair, the exclusive reason for the expenditure incurred must be for the intention to make economic activity which is subject to VAT. It considered this to be the case for Ryanair and concluded VAT recovery should be allowed.
It remains to be seen if HMRC issues a position on the CJEU’s decision in Ryanair: however, there are three points which businesses can still take away from the decision.
VAT recovery on these type of transaction costs continues to be an area of HMRC focus which shows no signs of abating, due to their complex nature, frequency and often significant quantum.
It is therefore important that businesses continue to take into account both HMRC’s position and wider case law at the earliest opportunity to maximize, and protect, VAT recovery so far as possible.
If organizations are unclear of their VAT obligations, then they should seek specialist advice where possible.
This article first appeared in Bloomberg Tax in November 2018.