The above brief confirms that HMRC has reviewed its policy following the decision of the Court of Appeal in the case of British Airport Authority (BAA) ([2013] England and Wales Court of Appeal Civ 112). The decision confirms that VAT is only recoverable where there is a direct and immediate link to taxable supplies. BAA was refused permission to appeal to the Supreme Court.

For the purpose of this brief, “taxable supplies” includes supplies not charged to UK VAT, but which carry a right to input tax recovery.

HMRC stress that following this decision there is no change in policy. In HMRC’s view, the facts in BAA related to particular circumstances and the decision does not address other commonly encountered issues relating to holding companies. HMRC has therefore updated its guidance to set out when HMRC considers that VAT recovery may be possible. The revised guidance can be found in HMRC’s VAT Input Tax Manual.

HMRC also advises that taxpayers should be aware that the German cases of Larentia & Minerva and others (C108/14 and C109/14) have been referred to the Court of Justice of the European Union (CJEU). The decision in those cases is likely to be relevant to the issues and guidance described and referred to in this brief. HMRC will review the policy contained in the guidance in the light of the CJEU’s determination of this reference, which is expected in approximately 12 to 18 months.

In the BAA case, a UK company, Airport Development and Investments Ltd (ADIL), which was owned by an investment consortium, made a bid to acquire the entire issued share capital of BAA plc. During this process ADIL received supplies of services in connection with the takeover bid. The takeover bid was successful and, subsequently, ADIL joined the BAA VAT group which then sought to recover the VAT that ADIL had incurred on those services.

The Court of Appeal noted that there are 2 conditions for the recovery of VAT. Firstly the tax must be incurred by a taxable person in the course of an economic activity. Secondly the goods and services on which the VAT is incurred must have a direct and immediate link with taxable supplies made by that person.

The Court of Appeal held that the BAA VAT group was not entitled to recover the VAT incurred on the costs of acquisition because when ADIL incurred the VAT:

• it was not carrying on an economic activity for VAT purposes, but was merely intending to takeover BAA plc by acquiring the shares in it; and
• there was no direct and immediate link between the services received by ADIL and the taxable supplies made by the BAA VAT group.

The Court of Appeal found that ADIL did not make, nor intend to make, taxable supplies of goods or services at the time the VAT was incurred. Acquiring the shares had economic consequences, but that did not mean ADIL was engaged in an economic activity for VAT purposes.

The new guidance referred to earlier covers the following issues:

• when a shareholding is used as part of an economic activity;
• when VAT may be recoverable by a holding company;
• the effect of a holding company joining a VAT Group; and
• how to treat mixed economic and non-economic activities.