Holding Companies – new HMRC VAT guidance expected soon
Gareth Bevan 18 March 2017 No comments
Following a number of recent VAT cases concerning the VAT recovery position of holding companies, we expect HMRC to issue updated guidance in the near future.
Holding companies and VAT recovery
The extent to which holding companies may recover VAT on costs is a complicated area. The main issue affecting the ability of holding companies to recover VAT is whether they are involved in an economic activity and the making of taxable supplies.
Simply holding shares in order to receive dividends and to sell them for a capital gain is an investment activity and not an economic activity for VAT purposes. Therefore, the VAT on the costs of acquiring and holding shares for either of these purposes is not recoverable.
However, holding companies are often also actively involved in the management of their subsidiaries and provide taxable services to them for consideration. This could include the provision of services such as administrative, financial, commercial or technical services. Holding companies which provide these type of taxable management services may recover VAT incurred on overhead costs related to those services.
HMRC’s current position
HMRC’s policy in this area was last updated in September 2014 when they issued a Revenue and Customs Brief following the Court of Appeal decision in the British Airport Authority (BAA) ( England and Wales Court of Appeal Civ 112). The decision in this case confirmed VAT is only recoverable by holding companies where there is a direct and immediate link to taxable supplies.
However, since then there have been a number of further developments on the issue following subsequent Upper Tribunal and Court of Justice of the European Union (CJEU) cases. Thus, HMRC guidance requires updating to reflect the decisions in these cases.
Laurentia + Minerva
In the joined cases of Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG v Finanzamt Nordenham, ECJ Case C–108/14 and Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG, ECJ Case C–109/14 the CJEU decided expenditure related to the acquisition of shareholdings in subsidiaries by a holding company which actively provided management services to those subsidiaries must be treated as belonging to the holding company’s general expenditure, and therefore VAT paid on the expenditure must, in principle, be deducted in full (provided no other exempt supplies are made by the holding company).
In Norseman Gold plc v HMRC  UKUT 69 (TCC) a UK holding company owned an Australian subsidiary engaged in mining exploration. The subsidiary was not profitable so charges for management services were made by book entry only. The subsidiary would only pay for the services when it could afford to.
In this case, it was accepted the holding company was genuinely providing management services which could be treated as an economic activity. However, the posting of book entries did not constitute payment.
A supply of services without consideration is not a business activity. Since there was no obligation to pay for the management services at the time they were provided and no consideration for the services, the Upper Tribunal held that the holding company was not entitled to recover any input tax.
Magyar Villamos Művek (MVM)
In a similar vein, in January 2017 the CJEU found in the MVM Magyar Villamos Művek Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatóság case (Case C-28/16) that the free supply of management services by a holding company to its subsidiaries was not an economic activity giving rise to a right to recover VAT. MVM had chosen to receive higher dividends rather than charge a fee for the services provided to its subsidiaries.
These cases demonstrate the importance of charging subsidiaries for taxable management services provided and receiving payment from them if a holding company wants to maximise its VAT recovery position.
New HMRC Guidance
We understand HMRC is planning to issue its new guidance next month (April 2017). Holding companies affected by these issues should review the new guidance carefully once it is available and be prepared to implement any changes necessary to ensure they do not suffer irrecoverable VAT unnecessarily
We will provide an update on our blog once the guidance has been issued. Please contact us if you require any further information on this subject.