Untangling the VAT Web: Navigating Recovery in Holding Company Transactions

The VAT position of a holding company can be complex, especially in corporate transactions. In this insight article, we explore when a holding company can recover VAT incurred on acquiring shares in a subsidiary. 

Stay tuned for our upcoming insight, where we will delve into recovering VAT on fees associated with a share disposal.

The issue of VAT recovery on corporate transactions is a notorious minefield, with HMRC's tough stance resulting in an extensive catalogue of case law. Businesses are unlikely to be regularly undertaking corporate transactions, which, when combined with high levels of input tax and exacting requirements, make this a high-risk area of VAT.

VAT Recovery on Deal Costs

For a holding company to recover the VAT incurred in relation to the acquisition of a new shareholding, it must meet the following criteria:

The holding company must be the recipient of the supply

It is crucial that the holding company is named in the engagement contract, and the invoices should be addressed to it. Simply paying for the services is not sufficient.

The holding company must be undertaking an economic activity

The traditional activity of a holding company, such as acquiring and holding shares of subsidiary companies and receiving dividends, is not considered to be an economic activity for VAT purposes. 

Therefore, a passive holding company cannot register for VAT or recover the VAT that it incurs on its costs. However, an active holding company that manages its subsidiaries and charges a management fee is considered to be undertaking an economic activity and can recover input tax, subject to the usual rules. A holding company can be considered to be only partially undertaking economic activities if it does provide management services to all of its subsidiaries.

The granting of loans to subsidiaries can also qualify as an economic activity. However, it is possible that this can also lead to an input tax restriction when the loan is provided to a UK established subsidiary.

The holding company must have the intention to make taxable supplies

The costs on which VAT is incurred must have a direct and immediate link to taxable supplies. This can be evidenced by the holding company proving management services to its subsidiaries.

It is important for the holding company to have the necessary capabilities to provide management services to its subsidiaries regularly. Documentation of intercompany agreements and board decisions is particularly important to provide evidence of management services taking place.

It has been held by the courts that when the consideration for management services is dependent on the subsidiary being profitable or is charged well below market rate, it ceases to be an economic activity.

A direct and immediate link to taxable supplies can also be evidenced when the acquisition of a shareholding is a direct, continuous, and necessary extension of the activities of the holding company. For example, acquiring a complementary business to increase market share or achieve greater efficiencies through economies of scale can establish this link.