VAT costs incurred by a holding company on the acquisition of shares have always been restricted by HMRC, but how has a European case made things easier?
Update. HMRC has finally published updated guidance on the recovery of VAT by holding companies. The update had ben expected to take the form of a Brief published on GOV.UK but instead HMRC has updated the VAT manuals.
Out with the old. HMRC’s previous policy was that VAT incurred on the acquisition costs of shared by a holding company was only recoverable where it was directly attributable to the provision of taxable services. It 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 – normally between five and ten years.
Case. Following the Court of Justice of the European Union (CJEU) decision in the joint cases Larentia & Minerva, HMRC has been reviewing its policy in respect of holding companies and deduction of VAT incurred on costs relating to acquisitions, mergers and corporate restructuring.
General expenses. 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 therefore as recoverable – subject to any partial exemption restriction. The new guidance incorporates this approach.
Tip. This is a fundamental shift in approach and should make VAT easier to recover where one company takes over another. Ensure that you include any (newly) qualifying expenses in your VAT return if your business is in this position.
You no longer need to show a link between the costs and making of taxable supplies to recover the VAT. If your company buys the shares of another, associated costs are now classed as general overheads.