Mark Cawthron assesses the ramifications of the Court of Appeal’s decision
This case has had its ‘twists and turns’. As is well known, it concerns recovery of VAT incurred by the acquiring company (A) in connection with its takeover in 2006 of the UK airports operator, BAA plc (B). B headed up the B VAT group. Following the takeover – though with an interval of 3 months – A joined the B VAT group. B sought recovery of £6.7m of VAT incurred by A on fees associated with the takeover.
Mark Cawthron assesses the ramifications of the Court of Appeal’s decision
This case has had its ‘twists and turns’. As is well known, it concerns recovery of VAT incurred by the acquiring company (A) in connection with its takeover in 2006 of the UK airports operator, BAA plc (B). B headed up the B VAT group. Following the takeover – though with an interval of 3 months – A joined the B VAT group. B sought recovery of £6.7m of VAT incurred by A on fees associated with the takeover.
For the Court of Appeal (‘CA’), there were two issues (a) whether at the appropriate time A was carrying on an ‘economic activity’, and (b) whether there was a ‘direct and immediate link’ between A’s inputs and the B VAT group’s outputs.
The FTT had held both (a) and (b) were satisfied, and found for B. The UT agreed with the FTT on (a), but not on (b), so found for HMRC. The CA held that neither (a) nor (b) was satisfied, and rejected B’s appeal. Maybe this lack of consensus should not surprise, given some arguably mixed findings of the FTT.
On the one hand, it found that A’s purpose was not only to acquire B’s shares, but also to provide high level strategic guidance of the on-going group. Yet on the other, the FTT found there was no evidence that A had the intention, prior to completion of the takeover, to make intra-group charges.
The CA picked up this latter - but clarified it in terms of the lack of any taxable supplies, or intention to make such supplies, being fatal to A’s contention that it was carrying on an ‘economic activity’. The CA also considered the ‘direct and immediate link’ issue, agreeing with the UT that the supplies to A were only in connection with the act of taking over B; such supplies were unconnected with any supplies A intended to make (at the relevant date there was no such intention anyway).
Further, the B group’s supplies were not connected at all with the supplies to A, and in this regard the CA declined to overturn (as B had sought) the FTT’s finding that there was no evidence of any intention, prior to completion of the acquisition, by A to join the B VAT group.
Importance of the facts
Mixed findings aside, the case is a reminder of how, in litigation, ‘findings of fact’ by the original tribunal are important – a point drummed into tax advisers learning the ropes of tax dispute resolution. Such findings will invariably limit room for manoeuvre by the UT or the Courts, on appeal.
Recovering VAT on takeover fees
All or nearly all the input VAT incurred on advisory fees connected with a takeover ought to fall into the ‘general overheads’ category, for VAT. On the basis of the CA’s judgment in this case, one might wonder whether, in order to recover such VAT, the Acquirer should show the necessary intention, at all relevant times, to make taxable supplies, and to make them itself (rather than from under the umbrella of the Target’s VAT group).
At the very least, if the intention was no more than to provide services to members of the Target VAT group only, and do so from within (as a member of) the Target VAT group, that may not be enough.
Deductibility of advisory fees
A second major area always to consider is the ‘direct tax’ treatment of takeover fees. The immediate thought might be that these fees of the Acquirer are ‘capital’, and not deductible for corporation tax. But takeovers will be complex, and in a private equity transaction for example might, on the acquiring side, comprise a TopCo, a HoldCo and an AcquisitionCo, undertaking the following:
raising finance (equity and debt) in TopCo, HoldCo and AcquisitionCo;
applying that finance to (i) acquire the shares in TargetCo, (ii)re-finance TargetCo and its subsidiaries, and (iii) provide additional working capital to the TargetCo group;
entering into new contracts on Closing, to take the business forward, for example new contracts of service with management, sometimes a ‘transitional services agreement’ with the vendor for on-going support services.
Fees related to raising finance are generally allowable, the starting point being CTA 2009, s. 307 (‘debits’ will include expenses ‘incurred directly in bringing [a] loan relationship into existence’); fees for drawing up the type of contracts in (c) above might generally be deductible.
Fortunately, the way in which the overall fees might break down for purposes of ‘deductibility’ ought not – on the whole - to affect the extent to which any VAT on those fees will be recoverable.
Mark Cawthron, tax writer, CCH
