The Court of Appeal has issued its judgment in the long-running dispute between BAA Plc (BAA) and HMRC, ruling against the airport operator.

BAA had appealed a decision of the Upper Tribunal that VAT could not be reclaimed on professional fees relating to advice in connection with the acquisition of BAA by a holding company.

In an unanimous judgment, the Court of Appeal dismissed BAA's appeal, upheld the decision of the Upper Tribunal and has confirmed that VAT incurred on the costs could not be reclaimed.

Lorraine Parkin, head of indirect tax at Grant Thornton, said that 'this judgment will come as a huge disappointment not only to BAA, but to a significant number of other taxpayers in a similar situation. However, the judgments do clearly indicate what features need to be present to support VAT recovery.

'The Court has confirmed that it is vital that the bidder company set up to acquire the target company must have an economic activity which enables it to reclaim the VAT. In BAA's case the Court has found that at the relevant time, the bidder company simply existed and acted to acquire the shares in BAA without carrying on any economic activity that involved actual taxable supplies in its own right and without forming any intention, prior to the completion of the takeover, either to make taxable supplies, or to join the BAA VAT group.'

Parkin adds: 'It seems clear from the judgment that had the bidder company been able to evidence that an economic activity (such as the provision of management services to the larger group) was intended at the time of the acquisition of BAA, and that it either had the human and technical resources available with which to deliver such services or it intended to buy such resources in, the outcome would have been very different.

'The outcome for BAA from this case is a costly lesson which others in the private equity and M&A field would do well to heed.'