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HMRC internal manual

VAT Input Tax

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Specific issues: definition and VAT status of holding companies

In simple terms a holding company is a company that holds shares in one or more subsidiary companies. Holding companies have a range of structures and purposes. Some have minimal activities. For example some may hold shares in subsidiaries and receive dividends but play no part in the management of their investment in the subsidiaries; whilst others are actively concerned with the supervision and management of their subsidiaries.

The status of holding companies has been examined by the courts on many occasions. An issue in all of these cases is whether and to what extent a holding company can be properly said to be carrying on an economic activity (referred to as a business in UK law). In considering the question of economic activity the courts (domestic and European) have broadly found two different ways in which a holding company could be engaged in an economic activity; the holding company could be supplying taxable services or exploiting intangible property.

When determining the extent to which a holding company is engaged in an economic activity and can recover VAT, an important consideration is whether the holding company is holding and managing its investments in subsidiaries for the purpose of receiving dividends in a fashion that is no different from that of a private investor whose activities do not amount to a business (i.e. an economic activity), as in Polysar (see VIT64050).

Alternatively, the holding company may provide management services to its subsidiaries and in these circumstances the cost of acquiring the shares in those subsidiaries may have a direct and immediate link with the holding company’s general economic activity and form part of their general overheads, as in Cibo (see VIT64050).

The Court of Appeal in the case of BAA noted that there are two conditions for the recovery of VAT. Firstly the tax must be incurred by a taxable person in the course of an economic activity. Secondly the goods and services on which the VAT is incurred must have a direct and immediate link with taxable supplies made by that person. See BAA at VIT64050.

The German courts have recently referred the cases of Larentia + Minerva & others (C-108/14 and C-109/14) to the CJEU. The decision in those cases is likely to be relevant in determining the extent to which UK holding companies, which make or intend to make management supplies to subsidiaries, can recover the VAT incurred on the cost of acquiring those shares.

See the definitions of taxable person and economic activity in Article 9 of the Principal VAT Directive at VIT11000. See also the definition of input tax in section 24 of VAT Act 1994 at VIT11500.