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HMRC internal manual

VAT Input Tax

Legal history: cases about holding companies

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


EU Case Law

Polysar Investments Netherlands BV C-60/90 [1993] STC 222

Polysar was part of a worldwide corporate group but was not in a VAT group. It held shares in various overseas companies. It received dividends from them and paid out dividends to its own holding company. Polysar attempted to recover VAT on certain costs. The issue was whether it was a taxable person carrying on economic activity.

The CJEU held that the mere acquisition and holding of shares was not an economic activity. This is because it did not amount to the exploitation of property for the purpose of obtaining income on a regular basis. Any dividend received from that holding was merely the result of ownership of the shares.

Floridienne SA and Berginvest SA C-142/99 [2000] STC 1044

Floridienne and Berginvest were holding companies; both were involved directly or indirectly in the management of their subsidiaries, they provided administrative, accounting and information technology services to their subsidiaries. They also provided loan finance to their subsidiaries through reinvesting dividends received from the subsidiaries.

The CJEU held that the holding companies’ involvement in the management of their subsidiaries (e.g. through the provision of administrative, accounting and information technology services to the subsidiaries) must be regarded as an economic activity where it entailed carrying out transactions which were subject to VAT.

In relation to the loan finance, because the holding companies merely reinvested the dividends from the subsidiaries in those subsidiaries as loans the interest on the loans was received as the result of ownership of an asset. VAT on related costs was therefore non-deductible. Loans that were made merely on an occasional basis, and in a way that was akin to managing an investment portfolio by a private investor, were not within the scope of VAT.

Welthgrove BV C-102/00 (2001)

Welthgrove was an intermediate holding company. It held shares in a number of companies manufacturing plastic packaging. Although members of its board of directors provided guidance to its subsidiaries no charge was made for this. It did, however, receive dividends from its subsidiaries. The CJEU held that the involvement of a holding company in the management of its subsidiaries would only be an economic activity insofar as it entailed carrying out transactions that were subject to VAT.

Cibo Participations SA C-16/00 [2002] STC 460

Cibo was a holding company that acquired significant holdings in three bicycle companies. Cibo attempted to recover the costs of acquiring those shares. The costs included:

•auditing the companies;

•assistance with the negotiation of the purchase price of the shares;

•organising the takeover of the companies; and

•legal and tax services.

Cibo derived income from those companies as dividends and from charges made in respect of taxable management services provided by it to the companies.

The Court of Justice of the European Union (CJEU) held that involvement in the management of subsidiaries constitutes an economic activity where it entails carrying out transactions which were subject to VAT. Such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services. In these circumstances, the costs incurred in the acquisition of the shares may form part of the holding company’s general costs and have a link with the holding company’s business as a whole and may therefore form part of the holding company’s general overheads.

If a holding company carries out transactions in respect of which VAT is deductible and transactions in respect of which it is not, it may deduct only that proportion of the VAT which is attributable to the former.

The receipt of income from dividends does not fall within the scope of VAT.

Empresa de Desenvolvimento Mineiro SGPS (EDM) C - 77/01 [2005] STC 65

EDM was a holding company that carried out financial transactions such as selling shares in and granting loans to companies in which it had a shareholding and participating in consortia for the exploration of mineral deposits.

The CJEU held that the simple acquisition and the mere sale of shares or other securities, such as holdings in investment funds, could not amount to exploitation of an asset intended to produce revenue on a continuing basis (and therefore wasn’t an economic activity). This was because the only consideration for those transactions consisted of a possible profit on the sale of those securities.

However, the interest received on bank deposits or placements in securities (such as Treasury notes or certificates of deposit) was within the scope of VAT. This is because the interest arose not from the simple ownership of the asset, but from making capital available for the benefit of third parties. The annual granting of interest-bearing loans by EDM to its subsidiaries was also seen as part of its economic activities for the same reason.

Investrand BV C-435/05 (2008) STC 518

Investrand originally owned just less than 44% of the shares in a clothing business. It sold those shares for a sum that partly depended on the future profits of that business. Investrand was a passive holding company at the time of the sale. Some years later it started providing management services under an agreement with the business sold. There was then a dispute over the basis on which the profits had been calculated. In the course of this dispute Investrand incurred costs on which it sought to recover the VAT.

The CJEU held that the original sale of shares was not part of any economic activity. It also held the steps Investrand took to recover the disputed part of the sale proceeds were not part of its subsequent economic activity either. Therefore, on the facts, there was no link between the costs incurred by Investrand in relation to the disputed part of the sale proceeds and Investrand’s subsequent economic activity.

AB SKF C-29/08 [2010] STC 419

SKF was the parent company of an industrial group. It played an active role in the management of its subsidiaries and supplied to them services such as management, administration and marketing policy. SKF was liable to VAT on the consideration that it charged for these services.

SKF intended to restructure the group. This involved the disposal of two companies (a wholly owned subsidiary and a controlled company which was in the past wholly owned by it), to which it had provided services subject to VAT, where the proceeds of sale would be used to finance other activities of the group. The relevant issue was whether the services that SKF intended to procure in relation to this (valuation of shares, assistance with negotiations and specialised legal advice for the drafting of the contracts) were part of SKF’s economic activity.

In this case, disposing of the shares in those companies to enable SKF to restructure the group could be regarded as a transaction that consisted in obtaining income on a continuing basis from activities (i.e. an economic activity) which went beyond the compass of the simple sale of shares. There would be a right to deduct VAT if it was the direct, permanent and necessary extension of the economic activity of SKF and there was a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person, which was for the referring court to determine.

Larentia +Minerva and Marenave Schiffart cases C-108/14 and C- 09/14 (2016)

Larentia + Minerva and Marenave are entities incorporated in Germany. They have subsidiaries that are Limited partnerships. They hold shares in the subsidiaries and charge them for management services.  They also receive dividends from the subsidiaries. The German tax authority considered them to be engaged in both business and non-business activities and sought an apportionment of any VAT incurred on capital costs.

The CJEU found that where holding companies incur expenditure on raising capital for acquisition of shareholdings in subsidiaries, to whom they also intend to provide management services, the VAT on costs incurred must be regarded as belonging to the holding company’s general expenditure and therefore deductible as input VAT (subject to any partial exemption restriction in place).


Magyar Villamos Muvek (MVM) C-28/16 (2017)

MVM was a Hungarian state-owned power company. It had economic activities of leasing power plants and fibre optic networks.  It also held subsidiaries to whom it provided management services, along with services provided to members of the corporate group to which it belonged. It did not charge for these services. It should be noted that MVM was a corporate group but not a VAT group.

MVM wished to reclaim all its input tax on costs incurred in making management services to its subsidiaries and corporate group, even though it provided these services free of charge.  The CJEU based on established principles confirmed that the involvement of MVM in the management of its subsidiaries without consideration could not be regarded as an economic activity.  The fact that MVM chose to receive higher dividends rather than charge for its services was considered decisive, it was not possible to take this course and recover VAT.

MVM confirms that in order to deduct input tax the costs must have a direct and immediate link to the holding company’s taxable outputs. 

UK Case law

BAA Plc [2013] EWCA Civ 112

In 2006 a Spanish consortium led by Ferrovial launched a bid to takeover BAA, a leading UK airport operator. A new company called Airport Development and Investments Limited (“ADIL”) was formed to make the bid. The bid was ultimately successful. BAA subsequently became a wholly owned subsidiary of ADIL and ADIL then became a member of BAA’s VAT group. Before joining the BAA VAT group, ADIL was not registered for VAT.

The case involved a claim for recovery by the BAA VAT Group of the VAT incurred by ADIL on various professional services it received in connection with the takeover. The question at issue in the litigation was whether or not this VAT was recoverable by the BAA VAT group.

HMRC decided that the input tax was non-deductible as it did not relate to economic activities. …

The FtT decided that ADIL carried on an economic activity and allowed the appeal.

The UT agreed that ADIL carried on an economic activity at the time it received the services but decided that there was no direct and immediate link between the costs on which the representative member of the BAA VAT Group sought to recover VAT and any onward taxable supplies made by the Vat group.

The UT concluded that none of the costs incurred by ADIL could be considered to be cost components of a taxable supply by ADIL or a taxable supply attributed to ADIL by reason of the VAT grouping provisions. HMRC maintained that the VAT did not become input tax simply by virtue of VAT grouping.

The Court of Appeal held that the BAA VAT group was not entitled to recover the VAT incurred on the costs of acquisition because when ADIL incurred the VAT:

•it was not carrying on an economic activity for VAT purposes, but was merely intending to take BAA plc over by acquiring the shares in it; and

•there was no direct and immediate link between the services received by ADIL and the taxable supplies made by the BAA VAT group

The Court of Appeal found that ADIL did not make, nor intend to make, taxable supplies of goods or services at the time the VAT was incurred. Acquiring the shares had economic consequences but did not mean ADIL was engaged in an economic activity for VAT purposes.

African Consolidated Resources v HMRC [2014] UKFTT 580

This case involved a holding company providing loans to its subsidiaries who were engaged in mining activities in Africa. In this instance, interest payments were added to the loans which were repayable on demand. Invoices for management services were issued for a fixed annual fee set at a level that the subsidiary could afford to pay rather than by reference to the value of the services provided. In practice no payments had been demanded in respect of the loans, interest or management fees. The FTT did accept that it was not realistic to expect activities undertaken intra-group to be conducted in the same way as those between third parties in terms of written contracts for these transactions. However, it found that because the fees for the management services were set at a level that reflected the subsidiary’s ability to pay rather than the cost of the services, the necessary economic link could not be established.

Norseman Gold PLC v HMRC [2016] UKUT 69 (TCC)

In the Norseman case, a particular difficulty for the holding company was the lack of any firm evidence that connected any invoices issued to any management services provided during the period in question. Norseman claimed that whilst it was not their intention that the management services would be provided free of charge, there was no point raising invoices until the subsidiaries were consistently generating profits.

The Upper Tribunal concluded that any mutual understanding at the time of supply that a charge would be made in the future was insufficient to establish the necessary immediate and direct link between the services provided and any payment to be made in the absence of any evidence identifying what would be charged. The accepted fact that a charge would only result if the subsidiary became profitable served to further weaken this link between the service and payment. Therefore it was necessary to demonstrate an intention to make taxable supplies, namely in return for a sum that would amount to consideration, when those supplies are made.

Heating Plumbing Supplies Ltd [2016] UKFTT

The appellant set up a new holding company to effect a buy-out of the appellant by its management and staff.  In advance of the buy-out, a new VAT group was formed with the appellant as representative member, and the new holding company included as a member.  VAT was incurred on professional services commissioned by the appellant in connection with the structure and implementation of the buy-out.  The FTT found as a fact that the purpose of the management-led buyout was to motivate and incentivise staff by giving them a stake in the business, with a view to improving its growth and efficiency.  It held that the facts were distinguishable from those which involved a “third party takeover”.

The FTT found ‘In a third party takeover such as that in BAA, in the absence of an intention to provide management or similar services that in their own right might constitute economic activity, professional costs associated with the takeover/acquisition of shares may not be linked with the underlying business activities.