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New HMRC guidance on VAT recovery for holding companies

Gareth Bevan 27 October 2017 No comments

New holding companies guidance

HMRC have now updated their internal guidance on holding companies.  Our earlier blog article outlined some of the recent VAT cases concerning the VAT recovery position of holding companies.  The new guidance brings HMRC policy into line with the decisions in these cases, helping to reduce the uncertainty there has been for a number of years on the issue.

When can VAT be recovered?

The guidance states that to be able to deduct VAT incurred on costs, holding companies should satisfy the following conditions:

  • the holding company making the claim must be the recipient of the supply
  • the holding company must be undertaking economic activity for VAT purposes
  • that economic activity must involve the making of taxable supplies
  • if the holding company is VAT grouped with its subsidiaries, it makes taxable supplies or loans for which it earns interest and the loans support the making of taxable supplies by the VAT group.

If the holding company is not the recipient of the supply, or is not undertaking economic activity, it will not be able to recover VAT.

Management services

The policy confirms that the making of, or intention to make, supplies of management services by a holding company to its subsidiaries is the undertaking of an economic activity for VAT purposes.

It is important to note that the management services must be genuine and provided for consideration which is more than nominal.

Direct and immediate link to taxable supplies

For VAT to be recoverable the costs incurred must have a direct and immediate link to taxable supplies.

If a holding company provides taxable management services to all its subsidiaries, then any VAT incurred on acquisition costs relating to the holding in those subsidiaries will be fully recoverable. The receipt of dividends does not affect the right to reclaim the VAT.

However, if a holding company incurs costs on acquiring shares in subsidiaries, intending to make taxable supplies to some of them, but not others, the acquisition of the latter subsidiaries is an investment activity which is not an economic activity for VAT Purposes.  Accordingly, the VAT incurred should be apportioned between the economic activities and the investment activities.  VAT relating to the investment activities cannot be recovered.

Also, if a holding company incurs costs relating to a subsidiary to which it provides both taxable management services and makes a loan to (earning exempt interest) then the VAT needs to be apportioned between the taxable and exempt activities, and recovered in line with the company’s partial exemption method.

Contingent consideration

The guidance also highlights that if a holding company provides or intends to provide management services to subsidiaries under terms where payment for the services is contingent on the profitability of those subsidiaries, then the holding company is not engaged in an economic activity.

HMRC’s policy is that a holding company has economic activity only if it provides genuine management services under an agreement to charge for those services and does actually charge fees and receive consideration for those services.

What businesses should do

We recommend that businesses with holding company structures review the robustness of their current arrangements to ensure they meet the requirements of HMRC’s revised policy.  Please contact us if you would like assistance with this.