The ability of holding companies to recover VAT on costs incurred continues to be hotly contested by HM Revenue & Customs. As such, companies must plan prudently and in a timely manner to protect their VAT recapture regarding refinancing, restructuring transactions and ongoing operating costs.
There have been several recent developments in UK and EU case law, and these provide useful advice on key principles.
These are summarized below, along with some key planning points. The April 2021 higher court ruling in the Tower Resources Plc case  UKUT 123 could provide a ‘road map’ of the steps that holding companies should take to ensure that they have an economic activity that results in the performance of taxable services and, therefore, a right to recover the tax. VAT.
Holding companies, what are they and what do they do?
The traditional concept of a holding company is a company that acquires and owns shares in subsidiaries and receives dividends that are outside the scope of VAT. However, these entities may be engaged in several additional activities, actively managing subsidiaries and providing services for a fee.
The nature of these activities will directly affect the ability of the holding company to recover VAT on the costs it incurs.
Suppose the holding company passively receives dividend income. In this case, it cannot register for VAT on its own because it carries out exclusively a non-commercial investment activity, as evidenced by the Polysar (C-60/90) and Larentia + Minerva (C- cases). 108 and C-109/14). While active trading of shares may be an exempt business activity (given the potential recovery of VAT on the sale of shares to foreign beneficiaries), the occasional or simple sale of shares by a holding company is not would not be considered an economic activity.
Carry out an economic activity
In order to register for VAT and recover VAT on costs, the holding company would have to carry on a taxable business activity (or “economic activity”) for VAT purposes. Assuming that they will not trade with third parties, in addition to the typical passive and non-commercial activities undertaken, holding companies could be “active” for VAT purposes through the provision of management services to subsidiaries.
These services generally cover strategic advice, accounting, administrative and IT services, which are generally subject to VAT at the standard rate, as shown in the cases of Cibo Participations SA (C-16/00) and Floridienne (C-142 / 99). In addition, the rental of commercial premises to a subsidiary would be exempt subject to the option of taxation, in the case of Marle (case reference necessary).
However, it is essential that such arrangements are well planned and structured, have substance and commercial justification, are genuinely implemented and are well documented, as various cases have shown several areas of challenge here.
However, many cases have shown that even where there are management service agreements to subsidiaries, the practicalities have undermined the notion of economic activity. It is important to note that the provision of services does not necessarily equate to economic activity. It is required that the service activity be carried out with a certain degree of regularity and sound business principles.
In the case of MVM (C-28/16), management services were provided but not remunerated; other cases lacked a repayment schedule (African Consolidated Resources) or suggested future payments but did not specify when (Norseman Gold  UKUT). These cases showed a break in the link between the offer and the counterparty, as did the notion of contingency fee agreements as in the case of Bluejay Mining. Here, the payment depended on the profitability of the subsidiaries, so that no contractual expectation of the holding company was ever paid for its services.
The case of Larentia + Minerva has shown that management fees have been charged to some subsidiaries but not to all, which raises the question of whether VAT recovery should be limited on this basis.
Tower Resources Plc
In the recent Upper Tribunal case of Tower Resources Plc, HMRC appealed the FTT decision because there was no written agreement in place for management services, and payment by subsidiaries was on a conditional basis, which would contradict the reciprocal nature of the supply. and consideration.
However, the Upper Tribunal agreed with the FTT’s ruling that there was in fact an agreement (albeit unwritten) and that the consideration for the management services was recorded in an intercompany loan account, the balances of which were refundable on request. The obligation to pay was therefore considered neither contingent nor uncertain. It was a resounding victory for the taxpayer. It should be noted that the Upper Tribunal decision sets a legally binding precedent. At the time of writing, it is not known whether HMRC will seek to appeal the decision.
Key planning points
In light of the various developments in the courts and guidelines from HMRC, the following key planning points should be considered:
- Plan early to create and establish the holding company’s business intentions and rationale and examine the basis for VAT registration and collection.
- When providing management services to subsidiaries, make sure that the management agreements are in place, correspond to business reality, have substance, and are properly evaluated. Another area of potential challenge is where there are common directors of the holding company and the commercial subsidiary; in this situation, no service may be provided when billing administrators’ time.
- Arrangements must be accompanied by appropriate billing and payment.
- Engage directly with advisors, making sure contracts are consistent with business reality and that VAT is properly billed by suppliers.
- Ensure a direct and immediate link with taxable business activities, and distribute / restrict VAT recovery where there is exempt business income or non-economic activities.
- The inclusion of a holding company in a VAT group would not in itself give rise to a recovery of VAT. The holding company should always carry on a taxable business activity.
We will no doubt continue to see further updates to the HMRC guidelines, as the issue is still a matter of challenge. HMRC often takes an aggressive stance due to the large amounts involved, varying complexities and the fact that cases are very sensitive to the facts. Businesses need to be aware of these issues and plan ahead as early as possible. They may want to consider seeking professional advice to help them navigate and overcome the various pitfalls.