We are regularly asked to advise on the VAT issues arising in connection with mergers, acquisitions and other corporate finance transactions. Often, the request for advice happens very late in the day – by which time it may be very difficult to resolve any adverse VAT consequences.
This has been a complex area since the very early days of VAT and there have been numerous case law decisions which have affected HMRC’s policy and practice. The current position relies on the 2014 Court of Appeal decisions in the cases of BAA and Airtours. These decisions led to HM Revenue and Customs issuing R&C Brief 32/14 which sets out their policy on the recovery of VAT by holding companies.
The guidance confirms that VAT can only be reclaimed by a holding company where it is incurred in the course of an economic activity and there is a ‘direct and immediate link’ with the making of taxable supplies. Generally this means that, in order to reclaim VAT on deal costs, the holding company needs to be providing services (normally in the form of management or administration services to associated trading entities). HMRC now take a strict line on these issues and will require objective proof that the holding company is providing such services in exchange for payment.
It is also vital to ensure that deal costs are ‘received’ by the correct entity in order to secure VAT recovery. It is not enough for the person making the VAT reclaim to show that they have paid for the services, or even that they have benefited from them. Rather, the claimant must show that the services have been supplied to them. This means that letters of engagement and other contractual arrangements with suppliers must be considered very carefully at the outset of the proposed transaction.
In addition to all of these requirements, the holding company must also either be VAT registered in its own right (or as part of a VAT group which makes taxable supplies) in order to reclaim VAT on deal fees.
If you are considering such a transaction please ensure that VAT gets included on the agenda from the outset. It can make a huge difference to the amount of VAT you can reclaim on deal costs.