Following the Court of Justice of the European Union (CJEU) decision in the joint cases Larentia +Minerva and Marenave, HMRC has reviewed its policy in respect of holding companies and deduction of VAT incurred on acquisition costs. To deduct VAT incurred on costs of acquiring shareholdings in subsidiaries their view is that each of the following conditions must be satisfied:
- the holding company making the claim must be the recipient of the supply
- the holding company must be undertaking economic activity for VAT purposes
- that economic activity must involve the making of taxable supplies.
- if the holding company is VAT grouped with its subsidiaries, it makes taxable supplies or loans for which it earns interest and the loans support the making of taxable supplies by the VAT group.
One area of particular note is HMRC's view on what they term 'contingent consideration for management services'. HMRC's guidance says that if a holding company incurs costs in providing or intending to provide management services to subsidiaries, whereby any payment will be contingent upon the profitability of those subsidiaries, then the holding company is not engaged in economic activity. In their view this is because where services are supplied for no consideration or there is no contractual expectation that consideration will be received, there is no supply for VAT purposes. This could be an area of concern for businesses and the basis for HMRC's policy will have to be carefully examined on a case by case basis, taking into account the case law in this area.
The updated guidance can be accessed here. It is hoped this will provide some certainty to businesses on HMRC's treatment of holding companies and VAT recovery.