The case dates back to July 2006 when Spanish infrastructure group Ferrovial acquired BAA through holding company Bidco.
Though Bidco did not become a member of the BAA VAT group until September 2006, the £7 million ($10.6 million) in adviser fees it ran up before this date were recovered as an overhead cost by BAA.
HM Revenue & Customs (HMRC), however, said that the VAT advice costs related to raising finance for Bidco and that there was no direct link between the supplies on which this VAT was incurred and any taxable supplies made by the BAA VAT group.
The First Tier Tribunal initially ruled in BAA’s favour, but when the Upper Tier Tribunal overturned this the case went to the Court of Appeal which ruled that Bidco did not carry out an economic activity at the point it incurred its VAT cost; and, because of this there was an insufficient link between Bidco’s VAT and the supplies subsequently made by the BAA VAT group.
“It’s bad news for BAA and any other taxpayers that have their cases stood behind this decision,” said Leigh Clark of Alvarez & Marsal Taxand. “It is helpful for other taxpayers considering acquisitions of a structure to know what they need to do to demonstrate that there will be an economic activity for the special purpose vehicle.”
“The key thing coming out of this is that the purchaser in this kind of transaction needs to be clear about their intention to make taxable supplies to the company they are looking to acquire,” Clark added. “That’s ultimately what BAA failed on; there was no evidence of those intentions at the time the costs were incurred.”
Clark advises that the company set up to acquire the task has got to be clear of its intentions from the outset to make taxable supplies to a group.
“At the very least you would expect to see decisions about management charges being documented in board meetings,” said Clark. “You would also expect to see agreements to reflect the fact that the acquirer will be providing genuine management support. The earlier that is documented the better.”
One VAT director at a multinational company points out that passive holding companies do not make taxable supplies and are generally unable to register for VAT.
“As a result, if a passive holding company incurs VAT when acquiring investments, it is unable to recover the VAT charged,” the VAT director said. “The question of neutrality arises when one considers this in relation to the acquisition of shares of a fully taxable business. Should VAT become a cost when all that has happened is that a fully taxable business has been acquired, and that business continues to make fully taxable supplies? This appears to lead to a cascading of VAT costs which breaches the principle of neutrality.”
BAA may choose to appeal to the Supreme Court, but if the underlying issue of passive holding companies is not addressed other companies may run into difficulties.
