The ability of holding companies to recover VAT on costs incurred has always been a complex area of tax law.

HMRC continues to target holding companies who are caught out by this complexity and we have also seen a number of HMRC enquiries in this area recently.  Over the years there have been many court cases that have resulted in additional guidance being issued by HMRC. For this reason, it is important that Finance Directors and business owners understand the basics and seek professional advice where needed in the recovery of VAT for holding companies.

Firstly let’s start with a basic understanding of what constitutes a holding company and then look at what needs to be considered if you want to recover VAT in a holding company.

What is a holding company?

A holding company is a separate company created to own a controlling interest in a subsidiary company or companies.

A holding company is often a company that simply acquires and holds shares in subsidiary companies and receives dividends that are outside the scope of VAT.

However, holding companies can also carry out additional activities, for example, actively managing subsidiaries and providing services to subsidiaries, such as management services and central administrative services. Holding companies may incur costs for the group and wish to recover the VAT on these costs.

The activities that a holding company undertakes will affect the company’s ability to recover VAT on the costs it incurs.

Input tax incurred in respect of non-economic activities, or in respect of supplies which are not taxable supplies will not be recoverable.

To recover VAT, a holding company must consider the key points below:

Economic activity for VAT purposes

A holding company can register for VAT if it undertakes an economic activity and makes, or intends to make, taxable supplies. Undertaking an economic activity means carrying out a business.

Management services provided to a subsidiary company

There have been cases in the past where agreements were in place for management services to be supplied to subsidiaries, however the way the arrangements were structured have meant that they were not classed as economic activity. The service activity should happen regularly and with sound business principles to be considered an economic activity.

If the holding company invoices subsidiaries for ‘management services provided’ where they have no management involvement and there is no evidence of other services being provided, they are unlikely to be classed as supplies for VAT purposes. HMRC will consider various factors to determine whether a supply is being made or whether the charge may be just a ‘book entry’.

If there is no formal agreement in place for the supply of management services, then it may be difficult to recover VAT on costs incurred, as it may be considered that the holding company is not making taxable supplies at the time the input tax is incurred.

Tax cases have established that where payment for management services is reliant on the subsidiary business profitability, then there is a break in the link between supply and consideration and will not be classed as an economic activity.

Purchase and sale of shares

The purchase and sale of shares by a holding company holding those shares as an investment is not classed as an economic activity for VAT purposes. Where it is considered a business activity, the sale of shares is exempt from VAT. This means that input tax will not usually be recoverable in respect of related costs. However, tax cases have identified some restricted circumstances where input tax recovery may be possible.

Receiving dividends

If a holding company merely receives dividend income, then it cannot register in its own right for VAT because it is engaged exclusively in a non-business investment activity. It will not be eligible to recover any input tax on costs.

In receipt of supplies

The holding company must actually be the recipient of supplies that it is looking to recover input VAT on, under general input tax recovery principles.

VAT recovery for holding companies is complex

These rules and past court cases have been extremely complex and there have been several developments in the courts and further HMRC guidance issues that mean you should seek advice from a tax professional.

Planning is key

It is vital that you plan well and consider the following:

• Establish intentions and commercial rationale of the holding company with VAT registration and recovery in mind.
• Ensure written service agreements are in place for management services to be provided before incurring associated costs. The agreements should match commercial reality, be correctly valued, have substance and provide for charges to be made, invoiced and paid.
• To recover input tax, it must have a direct and immediate link to taxable supplies.
• Consider input tax recovery if undertaking any corporate transactions such as the purchase or sale of subsidiary companies.
• Consider whether a VAT group may be suitable.

How Barnes Roffe can help

The recovery of VAT for holding companies is a contentious area and is subject to HMRC scrutiny and additional guidance. VAT regulations are subject to change and can be complex. With additional court case changes and guidance from HMRC, it is advisable for holding companies to seek advice from tax professionals such as Barnes Roffe.

Our experienced VAT team advise clients on the implications and needs of holding companies in the recovery of VAT. Contact us today to discuss and get help and advice on the recovery of VAT for holding companies and any other areas of VAT.

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