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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Legal history: cases about direct and immediate link

Please note that the following material is not a full summary of the case - it merely highlights the principle referred to in the appropriate section of this manual.

BLP Group plc 1995 STC 424

A normally taxable holding company sold off one of its subsidiaries by selling its shares. They did this because the group as a whole was in financial difficulty and needed funds so that they could continue to trade.

The ultimate purpose of the sale, therefore, was so that the group could continue to trade. In particular the reason for the sale was so that BLP could continue to charge taxable management charges to its other subsidiaries. BLP sought to link the costs of the exempt share sale to this ultimate purpose and deduct them as directly attributable to those taxable management charges.

This case brought out several important concepts, all arising from fundamental EU VAT law. Firstly it highlighted the need for a direct and immediate link between an input supply and taxable outputs for there to be any entitlement to deduct. It highlighted the idea of a “chain breaking” exempt supply that stops VAT flowing through the chain of one business’s output tax being another business’s input tax until the final consumer is reached. Also it confirmed that, as VAT is a transaction-based tax, the ultimate purpose of a business is irrelevant so it is only the immediate supply to which any input is a cost component that matters.

Please also refer to the material on AB SKF at VIT64050.