Businesses in the natural resources sector face challenges to their recovery of UK VAT on the basis they lack an 'economic activity' and are not 'in business' for VAT purposes.
The challenges are particularly acute where the business is in exploration or the early stages of generation. It is common in the natural resources sector for businesses to have a UK company ('UK plc') in London to attract investment with an office that employs a number of senior management, legal and financial staff, but with the exploration/revenue generation asset owned in another company (be it a UK or overseas subsidiary).
Typically, the UK plc is a holding company that will provide management services and strategic advice to its trading subsidiaries. In theory, this service activity should be 'taxable' for VAT purposes so that, in principle, the company is eligible to register and reclaim VAT. However, HMRC has successfully challenged businesses who have been unable to demonstrate UK plc has an economic activity and how the VAT on the costs it has incurred is used in that activity. In many ways, the VAT recovery questions are:
These two seemingly simple questions actually involve complex and evolving VAT technical principles that HMRC and businesses have been grappling with for some time. The good news is that in early 2017 HMRC indicated that they would be issuing updated guidance that sets-out their views on holding company VAT recovery. The revised guidance is long awaited as this topic has been a continued area of uncertainty with a multitude of case-law decisions making it difficult for businesses to know for sure when they can and cannot reclaim VAT.
It is hoped that HMRC's revised guidance will be issued in the next month or so. Whilst the issue of what constitutes an economic activity will always need to be considered based on the individual circumstances of each business, and there will always be areas of uncertainty or potential disagreement, it is hoped that the final version of the guidance should provide businesses with clarity and certainty over their position. It is this certainty that then makes it possible for businesses to develop a strategy and to move forward.