HMRC have released its updated guidance on holding companies and input VAT recovery.
HMRC have released the long awaited updated guidance for holding companies and VAT recovery. The changes have been made to HMRC’s Input Tax manual. VIT 64050 is a useful list and summary of the key CJEU and UK cases on holding companies (meaning of economic activity and right to recover VAT etc). VIT 40100 defines a holding company and how to determine its VAT status, (engaged in economic activity or not), updated to reflect the decision in Larentia + Minerva (C-108/14).
The key part of the new guidance is VIT 40600, which looks at when VAT is deductible by holding companies and to what extent. Essentially, in order for the VAT to be deductible, VAT must be incurred by a taxable person in the course of an economic activity and have a direct and immediate link to taxable supplies made by that person.
The guidance sets out that in order to receive a supply, a holding company must contract for it (including following a successful novation of a previous agreement), use it, be invoiced for it and have paid for it.
The guidance also confirms that management services provided on contingent terms (payable only if the subsidiary becomes profitable, for instance) are not in HMRC’s view an economic activity because the necessary reciprocity between the obligations of the holding company and of the subsidiary is absent.
There is also guidance about how mixed holding companies (both those that make taxable supplies to some subsidiaries and not to others, and those that make taxable supplies and exempt loans) should deal with the VAT incurred.
If a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company the acquisition costs can be deducted even if management charges are not made. This new approach may be a result of the Heating and Plumbing First-tier Tribunal (FTT) decision concerning the costs of a management buyout – where the FTT concluded the VAT was deductible even though no management supplies were made.
A holding company joining a VAT group cannot change a non-economic activity into an economic one or create an automatic link between holding company costs and the taxable outputs of other group members. This is based on the Commission v Ireland Advocate General’s Opinion, which HMRC consider the CJEU accepted in its entirety. The only effect of grouping is to impose joint and several liability on all members and to treat all supplies for VAT purposes as made to and by the representative member. For VAT to be deductible, the holding company must provide management services to the companies acquired in the VAT group, or earn interest from loans granted to them, and these must support taxable supplies made by the VAT group. The question that needs to be addressed is - has the VAT group incurred the costs for use in its economic activity?
If a member of a VAT group incurs costs for non-economic activity, the supplies are treated as being used by the representative member for non-economic purposes.
Stewardship costs (group audit, legal, brand defence, bid defence etc.) are costs for the purposes of the VAT group as a whole rather than for the purposes of the holding company activities.
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