Specific issues - basic functions of holding companies and their ability to register for VAT
The basic functions of a holding company are to:
- acquire shares in subsidiaries;
- receive dividends arising from the shareholdings;
- defend itself and its subsidiaries from takeovers; and
- dispose of shares in subsidiaries.
The above activities are investment activities and are non-economic activities for VAT purposes. A holding company cannot register for VAT if these are its only activities. VAT incurred on costs of these activities is not input tax and cannot be recovered.
There are no special rules for holding companies. To be registered for VAT the holding company must make or intend to make taxable supplies. These supplies may consist wholly or partly of management services to one or more of the holding company’s subsidiaries.
A holding company may be registered solely because it makes taxable supplies of management services. The holding company will need to evidence that the invoiced charges represent actual supplies of services performed. HMRC may check that the charges have not been raised on non-existent supplies simply to allow the holding company to register for VAT.
A VAT registered holding company with some economic activities must first apportion VAT incurred between that relating to its non-economic activities (always irrecoverable) and input VAT relating to its economic activities. If the VAT relating to economic activities includes both exempt and taxable supplies then the company must apply a PE method to determine recovery. For partly exempt holding companies input tax on overheads is treated as non attributable i.e. residual input tax.
Holding Companies and VAT group registration
A holding company can join a VAT group which may contain some or all of its subsidiary companies. To register as a VAT group at least one member of the proposed group must be making some taxable supplies that would make it liable or eligible to be registered in its own right.
Any VAT incurred by a holding company in making intra-group supplies to its subsidiaries can be recovered only to the extent that those costs are a cost component of taxable supplies made outside the VAT group by those subsidiaries. That is, to recover VAT there must be a direct and immediate link between the cost incurred by the holding company and the taxable supplies of the group.
It is important to remember that joining a VAT group does not, of itself give rise to an entitlement to recover VAT. It cannot change a non-economic (i.e. out of the scope) activity into an economic activity. Nor does it create a direct and immediate link between an input cost and a taxable output unless one can be traced through the intra group supplies. See VIT40600.
In a VAT group, the PE attribution of holding company input VAT is to the VAT group’s supplies, not to intra-VAT group management services.
If a holding company makes taxable supplies to subsidiaries outside the VAT group, it can recover its input tax on those costs that have a direct and immediate link to its taxable economic activities.