HMRC have finally published updated guidance on recovery of VAT by holding companies. The update had been expected to take the form of a Brief which would be published on Gov.uk but instead HMRC have updated the VAT manuals (also on Gov.uk) instead.
Following the CJEU decision in the joint cases Larentia +Minerva, HMRC has been reviewing their policy in respect of holding companies and deduction of VAT incurred on acquisition costs.
The CJEU held that VAT incurred by a holding company on the costs of acquiring shareholdings in subsidiaries to which it also intended to provide taxable management services, must be regarded as part of a holding company’s general overhead expenditure and thus as deductible (subject to any partial exemption restriction).
Prior to this case HMRC’s previous policy had been that VAT incurred on the acquisition costs of shares by a holding company was only deductible where it was directly attributable to the provision of taxable services. They also considered that VAT on costs incurred by holding companies was only recoverable if the intention was to recoup the expenditure by providing taxable services to subsidiaries within a ‘reasonable’ period of time.
The guidance covers:
- when a shareholding is regarded as bring used as part of an economic activity;
- whether a holding company is the recipient of a supply;
- whether a holding company is undertaking economic activity for VAT purposes;
- whether a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company;
- whether there is an intention to make taxable supplies;
- contingent consideration for management services;
- the effects of a holding company joining a VAT group;
- stewardship costs; and
- mixed economic and non-economic activities.
Businesses considering mergers, acquisitions and corporate restructures should read this guidance.