There have been several recent developments in UK and EU case law, and these provide useful guidance on the key principles.
These are summarised below, along with some essential planning points. The April 2021 Upper Tribunal decision in the case of Tower Resources Plc could provide a 'roadmap' of the steps holding companies should take to ensure they have an economic activity that results in the making of taxable supplies and consequently an entitlement to recover VAT.
The traditional concept of a holding company is a company that acquires and holds shares in subsidiary companies and receives dividends that are outside the scope of VAT. However, such entities can be engaged in several additional activities, actively managing subsidiaries and providing services for consideration.
The nature of those activities will directly affect the holding company’s ability to recover VAT on the costs it incurs.
Suppose the holding company just passively receives dividend income – in that case, it cannot register for VAT in its own right as it is engaged exclusively in non-business investment activity, as demonstrated in the cases of Polysar and Larentia + Minerva. qActive trading in shares can be an exempt business activity (noting potential VAT recovery in the sale of shares to overseas recipients when part of a business activity). On the other hand, the mere purchase and sale of shares by a person holding such shares for investment, such as a holding company, is not regarded as an economic activity.
In order to register for VAT and recover VAT on costs, the holding company would need to be carrying on a taxable business activity (or “economic activity”) for VAT purposes. On the assumption that a holding company does not supply services to third parties, in addition to the typical passive, non-business activities undertaken, holding companies could be ‘active’ for VAT purposes via the provision of management services to subsidiaries.
Such services typically cover strategic advice, accounting, administrative, and IT services, which are subject to VAT, as shown in the cases of Cibo Participations SA and Floridienne and Berginvest. Additionally, the leasing of commercial property to a subsidiary would be an exempt business activity subject to an option to tax, as in the case of Marle Participation.
However, it is essential that any such arrangements are well planned and structured, have substance and commercial rationale, are genuinely carried out, and are well documented, as various cases have shown several areas of challenge here.
However, many cases have shown that even where there are agreements for management services to subsidiaries, the practical arrangements have undermined the notion of economic activity. It is important to note that supplying services does not necessarily amount to economic activity. There is a requirement that the service activity is conducted with a degree of regularity and sound business principles.
In the case of MVM, management services were provided but the subsidiaries were not charged for these; other cases lacked a repayment schedule (African Consolidated Resources) or suggested future payments but did not specify the basis on which the fees were to be charged or when they fell due (Norseman Gold UKUT).
HMRC have sought to show that where payment for management services is contingent on the profitability of the subsidiary’s business then there is a break in the link between supply and consideration. The notion of contingent fee arrangements was considered by the First Tier Tribunal in the case of Bluejay Mining. In this case the subsidiary received invoices for services which were to be settled within 30 days. These invoices were added to the inter-company loan account which the tribunal viewed as payment of the invoice. The tribunal found that there was nothing contingent about the payments to be made under such contractual arrangements.
The case of Larentia + Minerva showed management charges were made to some subsidiaries but not all, and this raises a question as to whether VAT recovery should be restricted on that basis.
In the recent Upper Tribunal case of Tower Resources Plc, HMRC had appealed the FTT decision because there was no written agreement in place for the management services, and the payment by the subsidiaries was on a contingent basis, which would contradict the reciprocal nature of supply and consideration.
However, the Upper Tribunal agreed with the FTT decision that there was, in fact, an agreement (albeit not in writing), and that the amounts due for the management services were booked to an intercompany loan account, the balances of which were repayable on demand. The obligation to pay, therefore, was found not to be either contingent nor uncertain. This was a resounding win for the taxpayer. It is worth noting that the Upper Tribunal decision creates a legally binding precedent. At the time of writing, it is not known whether HMRC will seek to appeal the decision.
In light of the various developments in the courts and to HMRC guidance, the following key planning points should be considered:
We will no doubt continue to see further updates to HMRC guidance, as the matter is still very much a subject of challenge. HMRC often takes an aggressive stance due to large amounts at stake, the varying complexities, and because the cases are very fact sensitive. Businesses must be aware of these issues and plan at the earliest opportunity. They may wish to consider seeking professional advice to help navigate and overcome the various pitfalls.
To discuss this issue further, contact Robert Marchant or your usual Crowe contact.
This article was first published in Forbes Online in June 2021.
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