21 October 2011

Recovery of input VAT and the intention to make taxable supplies

 In the UK case of BAA Ltd v Revenue and Customs Commissioners [2011] UKUT 258 (TCC), the question that arose was whether VAT incurred by the taxpayer for professional services supplied to them during the takeover of a target company, could be claimed back in that it relates to the general overheads of the group.

The facts of the matter were briefly that Airport Development and Investments Limited (ADIL), was the acquisition vehicle in a takeover bid for the United Kingdom airport operator BAA plc (BAA) by an investment consortium, lead by a Spanish infrastructure group, Ferrovial.

ADIL incurred significant fees for investment banks, legal professionals and others in connection with the takeover. ADIL paid VAT on those fees. After the take-over ADIL joined the BAA VAT group and the latter proceeded to claim recovery of the input tax incurred on the fees as part of the group's general overheads. This claim was refused by the Revenue and Customs Commissioner on the basis that there was no direct link between the VAT incurred by ADIL and any taxable supplies made by the BAA VAT group.

The Upper Tribunal of the Tax and Chancery Chamber was asked to adjudicate whether the VAT incurred by ADIL on the professional services supplied to it has a sufficiently direct and immediate link to taxable supplies made by ADIL in the course of an economic activity.

The relevant provisions under UK tax law (and also South African tax law) provide that in order to recover VAT incurred on the acquisition of goods or services, the taxpayer must have incurred that VAT in the course of an economic activity and be a registered VAT vendor. For VAT incurred by a vendor to be recoverable, there must be a direct and immediate link to the onward taxable supplies of the vendor.

The First-tier Tribunal found that there was a direct an immediate link between the service expenditure and the overheads of the group. They accordingly allowed the taxpayer's appeal against the assessment of the Commissioner, despite their finding that ADIL did not actually make any taxable supplies in its own right and that there was no evidence that ADIL had the intention to make taxable supplies at the time it received the disputed supply of advisory services. However, the tribunal did conclude that ADIL carried on an economic activity from its inception. ADIL's activities, it found, went beyond the acquisition and holding of shares, and involved the management of the BAA companies.

This matter was taken on appeal to the Upper Tribunal and ADIL cross-appealed the tribunal's finding regarding its intention to make taxable supplies at the time it received the advisory services. ADIL's cross-appeal was dismissed on similar grounds to the First-tier Tribunal finding.
On appeal, the Upper-Tribunal concurred with the First-tier Tribunal finding that ADIL did have an economic activity, as the acquisition of BAA was the first step in onwards investment by ADIL and not an end in itself.

The Upper-Tribunal disagreed with the First-tier Tribunal in that it found that the professional services supplied to ADIL had no direct and immediate link to any onward taxable supplies made by themselves.

The Court reasoned that ADIL only had the intention to provide BAA with taxable supplies from the date of completion of the takeover and no such intention existed prior to that time. The court found that none of the fees incurred by ADIL, and consequently the VAT, could be attributed to a post-completion activity or a supply made by ADIL at all and would not be recoverable. It emphasised that the most important test is the intention of the taxpayer to make taxable supplies at the time the fees are incurred [Waterschap Zeeuws Vlaanderen v Staatssecretaris van Financiën Case C-378/02 [2005] STC 1298, ECR I-4685,paras 38-41]. An absence of this intention precludes recovery of the VAT incurred.

Danielle le Roux

The information and material published on this website is provided for general purposes only and does not constitute legal advice.

We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter.

We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages.

Please refer to the full terms and conditions on the website.

Copyright © 2021 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us cliffedekkerhofmeyr@cdhlegal.com