A recent decision of the European Court of Justice (ECJ) should mean that taxpayers will now be in a stronger position to support the recovery of VAT on M&A transactions, despite HMRC’s attempts to challenge deal fee VAT recovery. The risk of HMRC challenging Holding Company VAT recovery more generally has also diminished.
Over recent years, HMRC have mounted a strong two-pronged attack on deal fee VAT recovery. Firstly, even where deal fees are paid by the Holding Company, HMRC often argue that the services are received by the investors not the Holding Company. Secondly, even where HMRC accept that services are received by the Holding Company, they have typically argued that they relate to the Holding Company’s ‘non-economic’ activities (e.g. holding shares, payment of dividends), even where ‘economic activities’ (such as the provision of management services) are carried out. In September 2014, following their victory in the long running dispute with BAA on deal fee VAT recovery, HMRC issued guidance confirming their policy.
Firstly, HMRC stated that VAT recovery on deal fees would only be allowed in very specific circumstances where it could be demonstrated that the Holding Company was carrying out economic activities and where the deal fees were to be charged on within a ‘reasonable timeframe’. Secondly, Holding Company deal fee VAT recovery would always be subject to some level of restriction because Holding Companies always carried out ‘non-economic’ activities.
Larentia + Minerva ECJ Decision
In the case of Larentia + Minerva, the ECJ has now given a clear ruling that provided a Holding Company carries out economic activities, VAT incurred on services relating to the acquisition of a subsidiary should be fully recoverable (subject to partial exemption rules). The costs should be regarded as a general overhead of the business as a whole and no restriction should be applied because of the Holding Company’s ‘non-economic’ activities.
Although we continue to recommend that a formal service agreement is put in place between the Holding Company and its subsidiaries, the ECJ decision suggests that HMRC’s policy that the value of deal fees must be charged on to subsidiaries over a ‘reasonable timescale’ is unsustainable. The decision also suggests that an arrangement looser than a formal management services agreement may also be sufficient.
It will always be essential for the Holding Company to become VAT registered, either separately or in a VAT Group with its subsidiaries.
Although we expect HMRC to soften their approach to deal fee VAT recovery following this decision, it should be noted that the Larentia + Minerva decision only deals with one prong of HMRC’s current challenge to deal fee VAT recovery. It is possible that HMRC will continue to argue that services on which VAT is incurred are not received by the Holding Company seeking VAT recovery, so care still needs to be taken when structuring transactions.
Although the chances of achieving VAT recovery on M&A transactions will be enhanced by this decision, it remains important to carefully consider how deals are structured to ensure maximum VAT recovery.
Also, where VAT recovery has been restricted on past deal fees, consideration should be given to whether the position can be corrected. This will largely depend on when the VAT was incurred and how the VAT restriction arose.