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HMRC internal manual

VAT Input Tax

Specific issues: definition and VAT status of holding companies

In simple terms a holding company is a company that acquires and 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 basic functions of a holding company are to acquire and hold shares in subsidiaries (from which it may receive dividends); to defend itself and its subsidiaries from takeovers; and to dispose of shares in subsidiaries. These activities are investment activities and are non-economic activities for VAT purposes. 

To be registered for VAT the holding company must make or intend to make taxable supplies.

The VAT status of holding companies has been considered 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 activity in UK law). In considering the question of economic activity the courts (domestic and European) have broadly found a holding company could be engaged in an economic activity where it is supplying taxable services or exploiting intangible property.

In order to determine 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 CJEU released its decision in the German cases of Larentia + Minerva & others (C-108/14 and C-109/14) In July 2015. The CJEU found that VAT incurred on raising capital for acquisition of shareholdings in subsidiaries, to which the holding company  also intends to provide management services, must be regarded as belonging to the holding company’s general expenditure and is deductible (subject to any partial exemption restriction in place).  This decision is 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.