VAT recovery in the Natural Resources sector
HMRC has been narrowing the circumstances when VAT can be reclaimed, and have actively challenged businesses when they consider VAT was incorrectly recovered.
UK holding companies and VAT recovery
Businesses in the Natural Resources sector often have a UK holding company to attract investment. This company office will typically employ a number of senior management, legal and financial staff, but the exploration/revenue generation asset is owned by another company.
The challenge around VAT recovery in these cases typically focuses on whether there is a sufficient link between the costs incurred by the UK holding company, and taxable supplies being made by either it or its subsidiaries.
Common reasons why VAT has been irrecoverable
- No economic activity in UK plc, or insufficient link between costs incurred and that taxable activity.
- Common directors of the holding and operating companies mean that no actual services are being provided by UK plc.
- Informal arrangements mean it is not possible to evidence taxable supplies being made by UK plc.
- Failure to invoice and/or a lack of payment.
CasesHMRC v W Resources PlcThe recent First Tier Tribunal (FTT) decision in respect of W Resources Plc (WRP) highlights the fact that there must be a direct and immediate link to a taxable supply in order to recover any associated input (purchases) VAT. In the aforementioned case, the FTT ruling was that WRP, a holding company for a group involved in mineral exploration and exploitation, incurred input VAT prior to acquiring two subsidiaries. WRP’s intention was to recharge its costs as soon as the subsidiaries began to generate revenue of their own. HMRC considered this input VAT to be irrecoverable because there was no direct link with an economic activity and due to the fact that any recharge was contingent upon a certain outcome, namely the subsidiaries creating revenue of their own. The FTT found in favour of HMRC and the judgement highlights the fact that the VAT rules for recovering input VAT are not satisfied when there is uncertainty about whether payment would be received at all. This judgement mirrored that of the Upper Tribunal (a superior court) in the case of Norseman and acts as a timely reminder of the key VAT principles to be adhered to when setting up corporate management structures. |
Talk to your tax advisor
For companies in ongoing dispute with HMRC, we recommend talking to your tax adviser straight away.
For companies setting-up for the first time, or which are yet to review their arrangements, now is the time to put the business in the strongest position possible to justify VAT recovery.
How Crowe UK can help
We help businesses maximise their VAT recovery by:
- reviewing your current arrangements to make sure they would stand up to challenge
- supporting you with any remedial actions you may need to take; for example: the preparation of a Management Services Agreement, or invoice templates to evidence the economic activity being carried out
- helping you resolve disputes with HMRC.
To discuss these issues and how they apply to your business, please contact Robert Marchant, Partner, VAT.
