A holding company has been denied recovery of VAT incurred on its costs on the basis that ‘management services’ provided to its Australian subsidiaries did not amount to the making of any ‘taxable’ supplies that gave the right to recover VAT on underlying costs.
This decision - and the expected updated guidance from HMRC regarding recovery of VAT by holding companies - will be particularly relevant to any business which registered for VAT in the UK with the intention or expectation to make management charges to its subsidiaries (either EU or non-EU), and will be equally applicable to holding companies involved in M&A activity including reorganisations, company acquisitions and management buy-outs etc.
Key to the VAT Tribunal’s decision to deny VAT recovery was that, at the time the input tax was incurred, the company had no evidence that management services were being provided or would be provided, nor could it establish any direct and immediate link between any services that were supplied and charges levied or to be levied. The fact that the provision of management services for what was essentially a fixed fee based on what the subsidiary could afford to pay meant the activity did not constitute a taxable business activity for VAT purposes, and the company was denied recovery of VAT on its underlying costs.
Whilst we are still awaiting updated guidance from HMRC regarding the recovery of VAT on costs by holding companies, it is clear that this is an area which is likely to come under continued scrutiny by HMRC.
It remains to be seen whether the company will appeal this decision. In the meantime holding companies in similar positions would be wise to ensure that inter-company agreements and business plans contain a very clear understanding of what the holding company will provide in the form of management, administration or technical services, how the costs incurred by it will form the basis for the consideration of those services, and that periodic invoices are indeed raised for management services provided.
For further information please contact David Wilson or your usual RSM contact.