This is an important decision not just in terms of the amount of input tax that was claimed (£6.7 million) but in highlighting the importance of getting structures in place at the right time.
In looking to acquire airport operator BAA plc, the acquiring investment consortium created a special purpose vehicle (SPV) for the acquisition called Airport Development and Investments Ltd (“ADIL”).
ADIL was charged significant fees by investment banks, lawyers and others in connection with the takeover and paid VAT on those fees. After the successful takeover of BAA, ADIL joined the BAA VAT group and the representative member of the group made a claim for the recovery of the VAT paid by ADIL in connection with the takeover costs.
HM Revenue & Customs (HMRC) refused to repay ADIL’s input tax claim. HMRC said that they were investment costs incurred by ADIL in raising finance to acquire the BAA group. BAA countered that ADIL’s purpose was not just the acquisition of the shares of BAA but its intention and purpose was to participate in strategy and business planning of the group.
Following appeals to the VAT Tribunal then High Court, the appeal process has reached the Court of Appeal, which has just released its ruling.
The Court of Appeal found that at the time ADIL incurred the VAT it had no economic activity to which it could link the VAT incurred on expenditure. As such it was a passive investment business with no right to deduct input tax incurred. Importantly, the judgment went on to say that joining the BAA VAT group it did not create a direct and immediate link between ADIL’s inputs and the taxable supplies made by the target, BAA.
The case shows the need to ensure that any business incurring VAT costs is itself engaged in an economic activity at the time the cost is incurred. An intention to manage the company acquired may constitute an economic activity (or can be treated as such by joining a VAT group).
There may be obstacles to achieving a right to VAT recovery. For example it may be that an acquisition vehicle cannot be VAT grouped with the acquired business until after the acquisition is completed because of the common control requirement for VAT groups. In this case it may be necessary to build a case for VAT recovery based on separate registrations. This would bring into sharp focus several points that must be addressed such as achieving a VAT registration and reclaiming VAT; and raises issues that must be considered in advance of the acquisition.