HMRC have published Revenue Brief 32/2014, confirming that whilst their policy post-BAA remains unchanged, they have updated their guidance on deal costs.
What was the BAA case about?
The Ferrovial Group set up a new company (ADIL) to acquire the shares of airport operator BAA. ADIL incurred £6m of VAT on professional costs at a time when it was not registered for VAT. After the takeover, ADIL joined the BAA VAT group and sought to recover the VAT incurred.
In order to recover the VAT, the taxpayer needed to prove that ADIL was carrying on an economic activity (or intended to) at the time the costs were incurred, and that there was a direct link between the takeover costs and the taxable supplies of the BAA VAT group.
The Court of Appeal found that at the time the costs were incurred, ADIL’s only intention was to take over the group by acquiring the shares. There was no intention to carry out an economic activity such as providing management services (or to even join the BAA VAT group), even though this did come later.
HMRC’s guidance has been updated to reflect the specific scenario that was considered in the BAA litigation. Although BAA was denied leave to appeal to the Supreme Court, HMRC have indicated that they will review their policy again once a number of similar German cases (Larentia and Minerva) have been heard in the Court of Justice of the European Union (CJEU) in 12 to 18 months time.
Despite the ruling in BAA, deal costs remains an area where many businesses may still be eligible to recover a proportion of the VAT they incur. However, as the BAA case shows, VAT needs to be considered early on, not just in the context of the structure of the transaction, but also the post takeover activities and good quality documentation will be critical. BAA demonstrates just how difficult it is to deal with VAT effectively after the deal is done.
For further information on the recovery of VAT on deal costs please speak to Julie Park (firstname.lastname@example.org or 0208 941 9200).