HMRC is very strict in considering whether they accept a holding company can be considered to be in business for the purposes of recovering VAT. Holding strong supporting documentation is fundamental.
Traditionally, the activities of a holding company are considered to simply to hold and sell shares in subsidiaries and collect dividends. These are not recognised as business activities for VAT purposes. As a result, a traditional holding company cannot register for VAT, nor recover any VAT incurred on its supplier costs. Holding companies can incur significant costs when structuring a takeover or deciding to list on a stock exchange and the VAT element of these costs can be quite significant. The ability for a holding company to recover this VAT will undoubtedly be hugely beneficial.
When a company is a business
HMRC’s default position for a holding company is that it is not in business for VAT purposes. However, in fact many, holding companies have activities beyond passively holding investments, and may be actively involved in day-to-day management or in providing interest bearing commercial loans to their overseas subsidiaries (both of which may be considered business activities).
In such cases, the onus is on the holding company to prove, using documentary evidence, that it is not a traditional holding company and does carry on a business. However, it is not always the case that such evidence has been retained in the correct manner, or the evidence may not support the facts presented. This has resulted in many courtroom battles with holding companies being unable to recover their VAT costs for a variety of different reasons – leading VAT cases such as Polysar (C-60/90), BAA Plc, African Consolidated Resources and so on.
The usual rules
Generally speaking, businesses can register for VAT if they are in business for VAT purposes. That means regularly supplying and charging for goods or services. There are two types of VAT registration – mandatory (because the business exceeds registration thresholds already) and voluntary (where such thresholds are not exceeded, but the company is nonetheless in business). The VAT registration application form is no different, but HMRC does scrutinise voluntary registration applications more rigorously. This is particularly true when businesses identify that they intend to start trading in the near future but do not have evidence of historic trading as yet. HMRC requires proof of this intention, such as customer contracts, supplier contracts or purchase orders, so that it can be satisfied the business operations are legitimate.
Different for holding companies
The operations of a holding company do require a much higher level of scrutiny. This is because all the parties are related and they may be operating in a sector which have large costs but does not see any immediate profits (such as mining).
HMRC holding companies registering for VAT on a voluntary basis must have evidence that supports the intent to carry on a business – for example – documented management or loan agreements which are commercial in nature. HMRC will want to see invoices being raised to subsidiaries in a commercial manner for which there is an obligation to pay. If the holding company has not yet entered into agreements, HMRC would want to see other evidence (e.g. signed board minutes) that the holding company had an intention to provide such services at the time costs (bearing VAT which is reclaimed) were incurred, and at the effective date of registration. The timing of this evidence determines the date from which a holding company can register for UK VAT – if it is put in place later this would defer the effective date of VAT registration to that later point. Strictly any VAT incurred before this date will not be recoverable. So it is important to get it right.
Small signs of change
In the past HMRC would not approve a holding company VAT registration without first being satisfied with the documentary evidence. However, we have recently seen instances where HMRC approves the VAT registration application but will immediately audit the first VAT return – which would typically have a large VAT refund – and seek the information in that audit – so don’t get too excited until the refund hits your bank account.
HMRC will scrutinise the evidence and may well challenge it on the principles established in the leading VAT cases highlighted above. It is therefore important that the agreements/evidences are properly reviewed by a VAT expert so that they are reflective of the commercial reality and meets the relevant criteria. As it will be an intercompany agreement Corporate Tax, Transfer Pricing and Withholding Tax impacts should also be considered.
Ultimately, each case will be different and a balanced approach will need to be considered in light of the facts and the evidence that is available. There is no “one size fits all” solution but recent cases such as Bluejay Mining PLC and Tower Resources PLC have been found in favour of the taxpayer which provides some degree of certainty with respect to recovery of input tax incurred.
