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In the First Tier Tribunal (FTT) case of W Resources plc (WRP) the enduring matter of input tax recovery by a holding company was considered. This follows similar considerations in the cases of Norseman and BAA and HMRC’s updated guidance on the matter. This case considered whether a holding company could recover input tax incurred on certain costs. This is turn depended on whether the holding company intended to make taxable supplies. Specifically; the intention to recharge professional expenses incurred to two non VAT-grouped subsidiary companies contingent on those companies receiving income at a future time.
Background
WRP acquired two subsidiary companies. The subsidiary company’s business the exploration and exploitation of tungsten in the EU. WRP contended that it incurred the relevant input tax
- to enable the subsidiaries to raise funds to carry out their exploration activities
- to exercise financial control over the subsidiaries
- to obtain geological expertise, project management and supervision and day to day management and supervision for the subsidiaries so that they could carry on their exploration and exploitation activities
HMRC denied the claim of input tax on the basis that the WRP was not carrying on an economic activity or making supplies for a consideration (such that it should not be VAT registered).
It was common ground that, if it was decided that all of the supplies which were made by the WRP to the subsidiary companies (following their acquisition by the appellant) were supplies made for a consideration and in the course of carrying on an “economic activity”, then the input tax which was incurred during the preparatory phase should be recoverable.
So, the issue was – were the intended recharges so uncertain such that there could be no direct link to an economic activity?
Decision
The appeal was dismissed.
Although the judge distinguished Norseman (above) where there was only a vague intention to make charges to subsidiary companies and here the position was different because there was a fixed intention that WRP would be able to invoice in due course for its supplies of services at an amount quantified by reference to the value of the services received but only if the relevant subsidiary began to generate revenues, the fact that it was uncertain whether the subsidiaries would generate income was to sufficient to break the link between supply and consideration. The fact that the intended charges were contingent was fatal to the appeal.
Commentary
The judge appears to have come to the decision reluctantly and entertained the thought that “the contrary is certainly arguable”. This case demonstrates, yet again, the difficulties in determining future intentions of a business. Such intentions dictate whether a business may VAT register and/or recover input tax. It is often difficult to evidence intentions and HMRC seem intent to challenge input tax recovery in such circumstances and will be buoyed by this result.
This case again emphasises the importance of holding companies having appropriate processes and ensuring that proper documentation is in place to evidence, not only the intention to make taxable supplies of management charges, but that those charges were actually made to subsidiaries.
Often significant costs can be incurred by a holding company in cases such as acquisitions and restructuring. It is important that these costs are incurred by, and invoiced to, the appropriate entity in order for the VAT on them to be recovered. Consideration should be given to how the input tax is recovered before it is incurred, and the appropriate structure put in place if possible.
Further information and advice on inter-company charges may be found here