AN UPPER TRIBUNAL VAT ruling against BAA could affect any businesses involved in mergers or acquisitions, advisors have said.
BAA had been successful in the first-tier tribunal when it sought to recover VAT incurred following its acquisition by Airport Development Investments Limited (ADIL). However, the Upper Tribunal accepted HMRC’s appeal.
The case centred on negotiations between ADIL and third parties to secure financing, which began before the takeover and continued after it. ADIL joined the BAA VAT group, the group claiming the VAT incurred on various costs associated with the takeover.
VAT charged by lawyers, accountants and financiers can usually be claimed back later by companies. However, HMRC argued that ADIL – which is owned by Ferrovial – was never really in business. It said the recovery of the VAT related to investment costs incurred by ADIL in raising finance to acquire BAA and that there was no immediate link between the supplies on which the VAT was incurred and any supplies that could qualify for VAT made by the BAA VAT group.
Lorraine Parkin, head of indirect tax at Grant Thornton said: “This is an important decision for any business involved in an acquisition or merger. The tribunal did not accept that ADIL was carrying on an economic activity that spanned the completion of the acquisition of the BAA group of companies.
“As such, the VAT on services that ADIL started to incur prior to joining the VAT group could not be reclaimed under its subsequent VAT group registration with BAA.”
Parkin added that ADIL had “no evidence” to support its intention to join the BAA VAT group or to make any taxable supplies. “My advice to clients is that a formal company record should be kept about any intention to register a bidco for VAT and the role that it will play in the management of the new corporate group,” she added.
Tom Cartwright, a tax lawyer at law firm McGrigors, told the This is Money website: “The Revenue may not have won all its arguments, but it will not be disheartened from pursuing other cases.”
A HMRC spokesman said: “We are pleased that the Upper Tier Tribunal has confirmed HMRC’s policy that a business can only recover input VAT if it makes taxable output supplies.”
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