UK and International Tax news
UT Decision In Holding Company VAT Reclaim Appeal
Wednesday 25th May 2016
The UT has recently published its decision on an appeal from the FTT of a case involving VAT reclaims by a holding company which provided management services to overseas subsidiaries and also finance.
The appeal by Norseman Gold plc (Norseman) [2016 UKUT 0069] was against the decision of the FTT Judge, released on 12 June 2014, on the question as to whether Norseman was entitled to recover input tax for the period 10/07 to 01/09.
Norseman was VAT registered from October 2006. HMRC started to enquire into Norseman’s VAT returns in January 2009 as only repayment returns without any declared output tax had been received up until then. From April 2009, Norseman started to invoice its subsidiaries with management charges plus VAT [prior to the changes in the rules on place of supply with effect from January 2010].
Whilst Norseman was recovering input tax on its own costs [on accountancy and audit, raising finance, registrars’ and Stock Exchange, public relations services, and website design], HMRC discovered that it was in fact a holding company of a trading group [with mining subsidiaries] rather than a company with a mining trade itself as per Holdco’s VAT registration application. HMRC also found out that it had not been recharging all the relevant costs to the subsidiaries, with the reason given that the subsidiaries were not in a position to reimburse it for management services rendered if recharged on a full cost basis.
HMRC subsequently disallowed the input tax claims on the basis that Norseman was not undertaking an economic activity and making taxable supplies.
The FTT agreed with HMRC and noted in particular the lack of any formal agreement between Norseman and its subsidiaries, the management charges were not paid but dealt with by book entry, were fixed retrospectively and were not based on Holdco’s actual costs but on the subsidiaries ability to pay. In addition, there was no loan agreement or other evidence as to the terms of the provision of finance.
The Judge decided that taxable supplies had not been made by Norseman to its subsidiaries in the relevant VAT accounting periods and that the input tax for which the tax credit was claimed was not properly allowable. [See our UK Tax News article of 24 June 2014].
The UT held that this was a case where one party (Norseman) had supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if and when they had funds available to do) and no understanding of the amount of timing of such payment.
The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the service and might or might not include a profit element. This was an insufficient basis on which to be able to say, at any time prior to or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires.
If it was not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less was it possible to find a link where there was no payment at all in relation to services provided during the relevant period.
The UT added that if it was right in its view that Norseman had failed to establish a continuing intention to charge, retrospectively, for services provided during the relevant period, then there was clearly no relevant link because there was no intended payment to which the supply could be linked. It was not necessary, however, to rely on this conclusion to reach the ultimate conclusion that the input tax incurred in the relevant period cannot be claimed by Norseman.
Norseman’s appeal was dismissed.
If you would like to discuss this case in more detail, please contact Keith Rushen on 0207 486 2378.
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