When is VAT recoverable by holding companies
When a shareholding is used as part of an economic activity?
VAT may only be recovered if incurred in the course of an economic activity. If costs are incurred to acquire or maintain assets which are to be used for the purposes of an economic activity, the costs are potentially recoverable. If assets are not used for such a purpose, the VAT will not be recoverable.
Shares are a type of asset. Accordingly, if VAT is incurred on the costs of acquiring or holding shares, the first stage in deciding whether the VAT is recoverable is to determine whether the shares are to be used for an economic activity.
Simply holding shares in order to receive dividends and perhaps to sell them for a capital gain is an investment activity and not an economic activity for VAT purposes. Therefore the VAT on the costs of acquiring and holding shares for either of these purposes is not recoverable. For the VAT to be potentially recoverable the shares must have some other purpose which is economic.
- Shares may be acquired and held temporarily as part of an activity of trading in securities. Trading in securities is an economic activity.
- A further example is that a company may acquire and hold shares in subsidiaries in order to provide management services for consideration to those subsidiaries. The provision of services for consideration is an economic activity.
However, the costs of acquiring and holding shares will not relate to an economic activity where the provision of services is ancillary to the investment activity. The sections below give further explanation.
When VAT may be recoverable, by a holding company?
If goods and services are received in the course of an economic activity, the VAT incurred on those costs are recoverable provided the costs have a direct and immediate link to one or more taxable supplies. A cost has a direct and immediate link to supplies if the costs are used, or intended to be used, in the making of those supplies.
For there to be a direct and immediate link the costs incurred must be components of the price of the taxable supplies - VAT will only be recoverable to the extent that this is the case. Costs are components of the price of a taxable supply if they support the making of that supply and it is intended, at the time the costs are incurred, that the expenditure will be recouped from the income resulting from that supply.
For more on the meaning of the term direct and immediate link see VIT21000.
For more about cost components see VIT21000.
Provision of taxable services
Accordingly, VAT on costs incurred by a holding company may be recoverable if the intention is to recoup the expenditure from the income resulting from taxable services provided to subsidiaries. In many cases the intention will be that such costs are to be recovered over a period of time.
When setting prices to recoup the cost of capital expenditure HMRC expects businesses to take into account the need to make an adequate return on the capital expenditure and the future costs that they are likely to incur in relation to the assets acquired. Therefore HMRC are likely to challenge claims that the costs are to be recovered over timescales which would not allow the capital expenditure to be recouped for many years.
- Where company A incurs costs acquiring shares in company B, to whom A intends to supply taxable services (whether within a VAT group or not), these acquisition costs will only have a direct and immediate link to the supply of taxable services to B if they are used or intended to be used in making the taxable supplies to B.
- The VAT on the costs will then be recoverable to the extent that the acquisition costs support the making of the taxable supplies to B and are intended to be recouped from the price of the taxable supplies to B.
- If the evidence supports the view that the costs are to be recovered from the taxable supplies to B and the price is set to recover the costs over a sensible period of around five to ten years, then HMRC would accept that this will mean the cost is a component of the taxable supplies to B and not to the holding of shares in B.
- The costs will not be recoverable if the intention is to recoup the acquisition costs from income which is not the result of a taxable supply. For instance interest charged on exempt loans to B, dividends received from B, or from a capital gain if the price of the shares in B when sold exceeds the purchase price.
If a business recovers VAT on acquisition costs because it intends to recoup the costs by making taxable supplies to the subsidiary, it should retain evidence to demonstrate that this was the intended business model.
If the shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company, the VAT incurred may also have a direct and immediate link to the taxable supplies and be recoverable.
- A retail company incurs costs acquiring a subsidiary whose main asset is a property from which the retail company intends to trade. In these circumstances the acquisition of the shares may be an extension of the retail business rather than an investment.
- If this is the case, the costs of acquisition are likely to be cost components of the retail supplies to be made from the property. The shares were acquired in order to obtain the property for the retail business. The VAT incurred will be recoverable to the extent that the retail supplies are taxable.
The effect of a holding company joining a VAT Group
Joining or having an intention to join a VAT group which makes taxable supplies does not, in itself, allow a holding company to recover VAT it incurs. Therefore if a holding company incurs costs which relate to non-economic (i.e. non business) activity the VAT incurred on those costs remains irrecoverable.
Holding company engaged in economic activity
VAT may be recoverable where the holding company is engaged in economic activity and making supplies to subsidiaries within the VAT group, where the subsidiaries are making onward taxable supplies.
- A holding company incurs costs in order to provide services for a fee to its subsidiaries within the VAT group. If the subsidiary is making taxable supplies to persons outside the VAT group there may be a direct and immediate link between the costs incurred by the holding company and the onward taxable supplies of the subsidiary.
- The VAT on the goods and services received by the holding company and used to make supplies to the subsidiary will be recoverable to the extent that the costs incurred by the holding company are cost components of services provided by the holding company to the subsidiary and to the extent that the subsidiary uses the supplies from the holding company to make taxable supplies.
VAT on costs incurred by a holding company within a VAT group will not have a direct and immediate link to the supplies of the subsidiary merely because the holding company intends to charge the subsidiaries a fee.
The fee must be for goods or services which the holding company intends to supply to the subsidiaries and the costs incurred by the holding company:
- must be used for the purpose of making those supplies; and
- must be cost components of the price of services provided to the subsidiaries.
Mixed economic and non economic activities
A holding company may be involved in carrying out both economic and non-economic activities. In such cases VAT recovery is only allowable to the extent that the costs on which the VAT is incurred are attributable to taxable supplies which are intended to be made in the course of an economic activity.