16 January 2021
The First-tier Tax Tribunal (FTT) has issued its decision in Bluejay Mining plc, which could be helpful for holding companies that incorporate subsidiaries to build a new business over an extended period of time. While FTT decisions are not binding on other taxpayers, holding companies with long term projects should check that their intra-group agreements support their entitlement to VAT recovery and watch out for further developments.
Entitlement to recovery of VAT incurred on provision of services
European VAT case law has established that holding companies are entitled to recover VAT incurred in the course of making supplies of management and other services to their subsidiaries. However, a number of important appeals have arisen in recent years where HMRC has disallowed VAT recovery, arguing that payment for those services was contingent on the success or failure of the project, meaning that the holding company did not make a supply for VAT purposes because no consideration was payable.
Supplies made for consideration
In this case, the FTT has upheld the holding company’s right to recover VAT on its costs, finding that it had made supplies to its subsidiaries for consideration.
Bluejay carried out preparatory work to assess mining projects in various countries and recharge its costs, plus a markup, under a contract for services to local subsidiaries, which would go on to operate the finished mines. It made loans to those subsidiaries to pay for its services, on condition that the subsidiaries repay the debt once a project was successful or sold to another party. The loans were drawn down in instalments to pay Bluejay’s invoices.
HMRC’s view was that Bluejay was not making supplies to its subsidiaries for consideration and that it had no economic activity because the loan was not repayable if the project did not produce income.
However, the FTT has found in the taxpayer’s favour, deciding that its services to its subsidiaries were an economic activity. The FTT also found that the loan agreements and the contracts for services were separate contracts - while the repayment of the loans may have been contingent on the successful outcome of the projects, payment of the invoices for those services was always required.
Previous case law and appeals
HMRC won a similar previous case in the Upper Tribunal (UT), Norseman Gold, where it was found that the holding company had not made supplies to its subsidiary because the contracts only established a vague intention to levy an unspecified charge at some time in the future. However, taxpayers have now been successful at FTT level in three subsequent cases with slightly different fact patterns. One such case, has already been appealed to the UT and it is possible that HMRC may also appeal the Bluejay decision.
Whilst most recent cases on this area of law have involved the natural resources industry, which involve a long lead time to regular income, the principles involved can apply to any business where a holding company provides services to a subsidiary that doesn’t pay the consideration immediately and may not do so if the project doesn’t come to fruition.
Taxpayers in such situations should watch carefully for further developments in this litigation.
For further information, please get in touch with Philip Munn or your usual RSM contact.