Input VAT recovery on deal fees – BAA victory overturned
The Upper Tribunal has allowed the appeal by HMRC in the BAA Limited case, reversing a decision of the First Tier Tribunal (FTT) which had attracted much comment.
The appeal concerned the recovery of VAT incurred on professional fees in connection with the takeover of the BAA Plc group in 2006 by a company (then) called ADIL. The FTT had accepted the taxpayers' arguments that, even though ADIL was only a holding company and not registered for VAT when the costs were incurred, it was entitled to recover the VAT on the basis that the costs could be attributed to taxable supplies that it intended to make after the acquisition. HMRC appealed against this decision and the Upper Tribunal has now ruled that these fees were not attributable to any taxable activity of the acquiring company; nor could the VAT be recovered on the basis of an intention to join a VAT group with the target company. HMRC's assessment of around £6.7m was therefore reinstated.
After analysing the nature of the advisers' services, the FTT had already found that the professional fees incurred by ADIL were mainly concerned with the acquisition of the BAA group and the Upper Tribunal held that they could not therefore be said to have a direct and immediate link to the ongoing business of the acquired group. Furthermore, there was no proof that ADIL had always intended to join the VAT group, as it had claimed, and the FTT had even found as a fact that it had no such intention at the time that the costs were incurred. Accordingly, the costs could not be linked to the post-acquisition activities of the VAT group which ADIL subsequently joined.
Like the FTT, the Upper Tribunal was content that ADIL did carry on an "economic activity" for VAT purposes, on the grounds that the ADIL acquisition of BAA was not an end in itself, but was rather the first step of an investment which would require oversight and management. The fact that ADIL did not charge anything for any of its intra-group supplies of management following the takeover did not on its own preclude ADIL from having an intention to make taxable supplies. However, on the facts of this case, the input VAT incurred by ADIL did not, at the time the costs were incurred, have a "direct and immediate link" to any such activity.
What next?
Although this case was won by HMRC, the decision was based on the particular facts. The Upper Tribunal's judgement may even make life easier for other businesses by clarifying the tests that must be satisfied to ensure that VAT is recoverable, in particular the need for the acquisition vehicle to have an "economic activity" and an intention to make taxable supplies at the time that the costs are incurred. A vague intention to join or manage the group after the acquisition will not be sufficient.
The case again demonstrates the difficulties involved in this area and the need to ensure that VAT is considered at the planning stage of any takeover or acquisition. You should get in touch with your usual Smith & Williamson contact if you are involved in any such activity to ensure that the arrangements are as VAT efficient as possible and that any VAT incurred on professional fees can be recovered.
VAT on temporary staff – update
Most readers will be aware of the FTT's recent decision in the VAT case of Reed Employment Ltd v HMRC. HMRC has not appealed the decision, and have yet to release any official guidance on its implications. Employment businesses and their clients have been carefully considering how they should respond.
Following the introduction of new employment legislation in 2004, HMRC introduced certain concessions, the effect of which was that employment businesses supplying temporary staff charged VAT only on their fee or commission, rather than the full invoice value. This lasted until 1 April 2009, when the concessions were withdrawn. From that date employment businesses were required to charge VAT on the full value of their invoices, including the employee's salary and related tax/NIC payments. The Tribunal in Reed, however, held that the employment business did not, as HMRC had argued, 'buy in' the services of the temporary worker and supply them on to the client; rather, they should be seen as performing an introductory service, the value of which was their commission or fee. The judgment could significantly change the current VAT treatment of supplies made by recruitment businesses. If the decision is correct, many recruitment businesses will have overcharged substantial sums of VAT since April 2009 and their partly-exempt clients in the financial services, charity and healthcare sectors will be keen to claim a refund.
Many agencies are considering whether they can rely on the decision and some have already indicated that they will start charging VAT only on their commission, with immediate effect.
What next?
A decision made by the FTT is only persuasive and not binding on other parties. Therefore, the decision by HMRC not to appeal may indicate an intention to limit the application of this decision only to the particular circumstances of Reed. While, arguably, HMRC could take this position, this could be taken as acceptance by HMRC that temporary workers are supplied on an agency basis, and that VAT should only be levied on the commission element.
We feel that HMRC cannot continue to say nothing – this issue is not going to go away. They must either say that their policy from 1 April 2009 was correct, notwithstanding the Tribunal's findings (which would then lead to a new test case), or say that they accept its views and set out the criteria that other employment businesses must satisfy if they are to charge VAT on the fee only.
If you are an employment business making supplies of self-employed temporary workers, you should seek urgent professional advice on how to protect your position, both going forward and if retrospective VAT claims are requested by your clients.
Conversely, if you are a business or organisation that has used temporary workers, and has not recovered VAT in full on the charges made to you by employment businesses or believe that VAT has simply been overcharged to you for your 'temps', you should also seek urgent advice on how to proceed with your suppliers to secure a VAT refund. Please contact your usual Smith & Williamson contact for further information.
End of zero rating for 'design and build' construction?
HMRC has published a draft version of the public notice on construction services, and appears to have taken the opportunity to try and sneak in an amendment which could signal the end for zero rated 'design and build' contracts.
'Design and build' arrangements enable buyers to avoid irrecoverable VAT on professional fees incurred when acquiring new build residential property, by ensuring that all the professionals work for the building contractor rather than directly for the end client. Under this arrangement the 20% VAT on the professional advisers' fees is recovered by the building contractor, who in turn does not have to pass it on to the end client (as he is supplying a zero-rated building).
A change would mean a significant increase in costs for many businesses and their clients. 'Design and build' was previously seen as an accepted approach by HMRC, and is heavily relied upon by housing associations and other businesses unable to recover VAT.
What next?
At this stage discussions with HMRC are still ongoing. In the current climate, when everything possible is being done to kick-start residential development, it is difficult to see how HMRC will be able to get this amendment through. However, if the change does take place it will add significantly to the build cost for many developers, and the rationale for the increasing use of captive development companies by housing associations may well disappear.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.