Deal costs: VAT recovery; significant risk area for businesses
The perennial issue of entitlement to VAT recovery on professional fees incurred on company acquisitions, re-organisations and other corporate deal activity has again been decided in favour of HMRC in the Court of Appeal case of Airtours Holidays Transport Ltd [July 2014]. This decision must be of concern to any business trying to recover VAT costs not only in re-structuring reinforces the lessons about the steps to be taken that aim to maximise a business’s VAT recovery position. The full case can be viewed at http://www.bailii.org/ew/cases/EWCA/Civ/2014/1033.html
Why is this important?
Back in 2002 Airtours was in severe financial difficulties and appointed PwC to report to its lenders on its financial situation. The report was to be provided to the banks, at Airtours expense. Airtours sought to recover the VAT on PwC’s invoices but HMRC denied recovery on the basis that the supplies were made by PwC to the banks and not to Airtours.
The Court of Appeal decided that Airtours role in the contract “was limited to incurring an obligation to pay for the services provided by PwC to the banks and to indemnify PwC against any liabilities they might incur in carrying out their task.”
This case considers the question of who is the recipient of the supply on the basis that it is only the recipient of a supply who has an entitlement to claim the VAT charged. It is worth considering this decision together with the Court of Appeal case in BAA Ltd [February 2013] which considered two further fundamental questions does the business carry on an economic activity and is there a direct and immediate link to taxable supplies. Professional fees were incurred by a new holding company (‘ADIL’) which was set up by the Ferrovial group to acquire BAA. The court’s decision was to deny recovery of VAT on professional fees invoiced to ADIL on the basis that ADIL at the time was not carrying on an economic activity (it was essentially a holding company) and there was no direct and immediate link to taxable supplies. The full case can be viewed at http://www.bailii.org/ew/cases/EWCA/Civ/2013/112.html
With the economy growing and business confidence buoyant, deal activity is increasing and businesses involved in or considering a deal need to be aware of the risks of incorrectly recovering VAT on advisors fees and take notice of the key lessons learned from Airtours and BAA:
- At the time the VAT is incurred, the company must be the recipient of the supply of professional services;
- The company must be carrying on an economic activity when it incurs the VAT, and
- The VAT incurred must have a direct and immediate link to taxable supplies