Grant Thornton – Holding companies under scrutiny over VAT recovery (UK)

According to long-standing case law, pure holding companies that simply hold shares in subsidiaries are not considered for VAT purposes as undertaking an ‘economic activity’, which means that VAT incurred by such companies can’t be reclaimed. Under the basic principles of VAT, something of substance must be done in return for a consideration in order for an economic activity to have taken place.

When a holding company takes an active role, however – where the services provided by the holding company to the subsidiaries are for genuine consideration – the holding company is regarded as undertaking economic activities, which give rise to a right to recover VAT incurred on costs.

However, two recent cases of African Consolidated Resources plc and Norseman Gold plc – see our attached case alert for full details – have highlighted an issue around the provision of loan finance and management services by the holding company to its overseas subsidiaries. The debate surrounds whether their activities amount to an economic activity eligible for UK VAT registration and subsequent input tax recovery by the holding company.

Following another recent case involving the British Airport Authority (BAA), HM Revenue & Customs has also released an update on the circumstances in which VAT can be reclaimed by holding companies in a VAT group with their subsidiaries. You can read the updated guidance here: VAT – policy on holding companies.

In summary, HMRC’s revised position seems to be that, in order for holding companies to reclaim VAT on their costs, those costs must be recharged to their subsidiaries. In turn, HMRC believes the subsidiaries must then use the costs recharged to make a taxable supply.

The issue is undeniably complex and the rulings in African Consolidated Resources and Norseman Gold are only in the first-tier tribunal stage, which means only the parties involved are bound by these decisions. But in light of this increased scrutiny, it is our view that group finance directors should be considering their existing structures to ensure that the recovery of input tax is not put at risk.