United Kingdom
27 June 2011 - HMRC wins appeal on VAT on deal fees
HMRC has won its appeal to the Upper Tribunal in the BAA deal fees case, concerning costs incurred by a special purpose company (ADIL) established to acquire the share capital of BAA plc.
In addition to acquiring the shares, ADIL’s activities included its direct involvement in the management of the companies acquired. Immediately after the acquisition – and before ADIL made any taxable supplies - ADIL was added to the BAA VAT group, which sought to recover the VAT on adviser’s fees associated with the transaction.
At the First Tier Tax Tribunal HMRC argued that ADIL was not involved in an economic activity and that the input tax could not be assimilated to the activities of the VAT group, but ADIL successfully argued that the VAT should be recoverable. However, the Upper Tribunal ruled that although ADIL was carrying on an economic activity, it made no taxable supplies of its own before it joined the VAT group, and the supplies made by other group companies were not relevant at a time when it was not a member of the group. The lack of a direct and immediate link between the supplies made to ADIL and any taxable supplies made by ADIL (or attributable to ADIL) meant that ADIL did not have the right to recover the VAT in question.
It remains to be seen whether the taxpayer will appeal this latest decision in the Court of Appeal but, as the Upper Tribunal agreed that ADIL was carrying on an economic activity, advisers in similar cases in the future should note that it may increase the chances of recovering VAT if an intention to join a VAT group is evidenced at the outset, and that, if possible, some taxable supplies are made before joining the group.
Please contact Stephen James to discuss this decision.