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Can holding companies reclaim VAT on company purchases?

By RJP LLP on 27 June 2017

Growth by acquisition remains a very popular strategy for business owners and it inevitably attracts expenses in the form of legal and accountancy costs, most of which will incur VAT. Normally, the business will seek to recover the VAT charges incurred (input tax), but there have been numerous cases where this has been refused, resulting in a tax tribunal. Although it would seem obvious that input tax should always be recoverable, the acid test for HMRC is whether ‘the input tax has a direct and immediate link to a taxable supply’. If it does the VAT can be recovered but if not, such cases have historically been rejected.

A well known example where this has happened was Norseman Gold plc vs HMRC in February 2016, which has subsequently become something of a test case in these situations. As a result, HMRC recently clarified its policy on eligibility to recover input VAT on holding company purchases in May 2017 and has issued new guidance for business owners. The qualifying criteria are complicated and involve ascertaining whether a broad range of variables apply, which is beyond the scope of this article. For instance the purchaser needs to demonstrate that holding the shares forms part of taxable business activity, whether the holding company is a recipient of the purchase and also, that there is an intention to make taxable supplies. Many claims are rejected and our advice to clients is to discuss your circumstances with a VAT specialist as early as possible. This way you can either maximise your chances of being eligible, or have a contingency plan in place if you are not able to recover these costs.

If you need some help with your VAT compliance or need some initial advice please contact partners@rjp.co.uk

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Growth by acquisition remains a very popular strategy for business owners and it inevitably attracts expenses in the form of legal and accountancy costs, most of which will incur VAT. Normally, the business will seek to recover the VAT charges incurred (input tax), but there have been numerous cases where this has been refused, resulting in a tax tribunal. Although it would seem obvious that input tax should always be recoverable, the acid test for HMRC is whether ‘the input tax has a direct and immediate link to a taxable supply’. If it does the VAT can be recovered but if not, such cases have historically been rejected.

A well known example where this has happened was Norseman Gold plc vs HMRC in February 2016, which has subsequently become something of a test case in these situations. As a result, HMRC recently clarified its policy on eligibility to recover input VAT on holding company purchases in May 2017 and has issued new guidance for business owners. The qualifying criteria are complicated and involve ascertaining whether a broad range of variables apply, which is beyond the scope of this article. For instance the purchaser needs to demonstrate that holding the shares forms part of taxable business activity, whether the holding company is a recipient of the purchase and also, that there is an intention to make taxable supplies. Many claims are rejected and our advice to clients is to discuss your circumstances with a VAT specialist as early as possible. This way you can either maximise your chances of being eligible, or have a contingency plan in place if you are not able to recover these costs.

If you need some help with your VAT compliance or need some initial advice please contact partners@rjp.co.uk