VAT on acquisition costs following the Court of Appeal decision in BAA -v- HMRC

The long-awaited decision by the Court of Appeal in the case of BAA -v- HMRC was handed down on 21 February. The issue is whether VAT on costs incurred by ADIL, the special purpose vehicle which acquired BAA in 2006, were recoverable. The costs comprised fees payable to Macquarie, as financial advisers, and to Freshfields, as lawyers.

The fees were incurred for the purposes of the takeover so the work was carried out before ADIL and BAA became parent and subsidiary. The evidence showed that at that time there was:

• no intention that ADIL should become part of the BAA VAT group; and
• no intention that ADIL would charge BAA for inter-group services.

However, ADIL joined the BAA VAT group immediately after the acquisition; so it was BAA as representative member of the group which made the claim.

On this basis the Upper Tier Tribunal had previously held that although ADIL carried on an economic activity, the costs were not attributable to taxable supplies because at the time when they were incurred there was no intention that ADIL or any group of which it proposed to become a member would make VATable supplies at all.

In order to recover VAT, ADIL had to show that it was carrying on economic activities at the time when the supplies were received and also that they could be attributed to either specific supplies or to the general overheads of itself or the BAA VAT group. They failed to do so, the court holding that:

• there was no evidence that ADIL intended to make taxable supplies at the time when the expenses were incurred and accordingly it was not carrying on an economic activity for VAT purposes. The mere fact that the acquisition of shares would have economic consequences did not make their acquisition an economic activity. The court accepted HMRC's argument that all ADIL was doing at the time was carrying out investment activities for profit and there is ECJ authority that that is not an economic activity for VAT. This alone would have been sufficient to torpedo the claim;
• there was no direct or immediate link between the services received by ADIL and any taxable supplies. At the relevant date, ADIL had no intention of making supplies itself and it could not argue that its costs were attributable to the supplies of the BAA VAT group, as its successor, because it had no intention of joining that group. Nor for the same reason could the costs be treated as overheads of a person making taxable supplies; and
• the position could not be rescued by relying on German VAT authority to the effect that an entity can recover VAT on expenses which relate to the future supplies by its successor to the business. When the costs were incurred there was no intention of any successorship.

Although it has been long in gestation, the decision is a disappointment. Quite apart from any question of appeal, one is left wondering what would have happened if:

• ADIL had always intended to make supplies of management services to BAA for consideration. That would probably have been an economic activity, although a further finding that the costs of the takeover were attributable to those services would seem unrealistic. Still, at present, we do not really know; or
• ADIL had always planned to enter the BAA VAT group. Clearly, expenses of the takeover would not have become an economic ingredient of the ongoing supplies simply because a grouping election was made but perhaps they would have been regarded as overheads of the "continuing business" carried on by the group. In its judgment, the Court of Appeal states that "BAA was not the successor of ADIL". Really? It was not intended to be a successor at the time when the costs were incurred, which was sufficient for this case, but that is not quite the same thing.

So what is the VAT position on fees for corporate acquisitions pending further resolution of all this? Plainly, acquisition vehicles should not expect to recover the input tax, but they should position themselves to take advantage of any reversal/restriction of this decision. Accordingly, on a takeover it will be important to document:

• the intention of the acquiring vehicle to provide services to the target group following the takeover; and
• the intention of the acquiring vehicle that a VAT group should be formed with the target.

Please click on the links below for the other articles in the February 2013 tax newsletter.

• HMRC publishes settlement opportunity
• Secret Hotels2 Ltd -v- HMRC: Court of Appeal
• HMRC -v- Charlton: FTT case on discovery assessments and possible defences
• Taylor Clark Leisure plc: VAT groups and repayment claims
• R (Prudential plc & another) -v- Special Commissioner of Income Tax: Supreme Court judgment on legal advice privilege
• HMRC -v- Anson: Court of Appeal rules on the tax transparency of Delaware LLCs
• UK FATCA regulations
• Proposed financial transaction tax