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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Legal history: cases about holding companies

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.

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. Ferrovial had developed a special expertise in infrastructure projects such as commercial airports and wished to invest on a long term basis.

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 representative member of the BAA VAT group appealed to the First Tier Tribunal (FtT).

The FtT decided that ADIL carried on an economic activity and allowed the appeal. The FtT concluded that ADIL’s the strategic input at board level and the enduring benefit to the BAA VAT group of some of the costs incurred by ADIL were sufficient to ensure VAT recovery. HMRC appealed to the Upper Tribunal (UT).

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 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 representative member of the BAA VAT Group appealed to the Court of Appeal.

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.

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) waswithin 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.

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 (eg 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.

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 (ie 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.

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.

Welthgrove BV C-102/00

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.