Mitchell Charlesworth warns holding companies of complex tax pitfalls, following new guidance from HMRC


Mitchell Charlesworth is urging holding companies to beware of complex tax pitfalls, following new guidance issued by HMRC.

Mitchell Charlesworth VAT specialist Gemma McCaldon-Gower said HMRC has released new
guidance clarifying the position for VAT recovery by holding companies.

HMRC Money

It follows a high-level Court of Appeal judgement involving UK airport operator BAA which ruled that VAT incurred by a holding company on a takeover was not recoverable.

Mrs McCaldon-Gower said the updated manual emphasised the need to seek specialist support to ensure appropriate structures are in place to both manage and maximise VAT recovery.

“The issue of tax recovery for holding companies is a highly technical area, requiring specialist knowledge,” she said. “These intricacies have been a consistent source of difficulty for taxpayers, which are demonstrated by these high profile VAT cases.

 “The recent BAA judgement did not affect HMRC policy. However, HMRC stated that other commonly encountered issues related to holding companies were not addressed by the ruling prompting it tomove with the guidance.

“In light of this, we strongly urge companies to act quickly, seeking professional support to ensure that VAT efficient structures are in place. There are major ramifications for neglecting the issue.

“Essentially, companies risk losing large sums of money through mismanagement of tax operations. Furthermore, they may fail to maximise full VAT recovery.”

HMRC’s latest guidance states that holding companies can only recover VAT if costs from those arrangements are incurred when pursuing an ‘economic activity’.

Mrs McCaldon-Gower said this is the critical point and remains a key area of risk. Furthermore, the goods and services on which the VAT is incurred must have a direct and immediate link with taxable supplies made by the holding company.

 “Holding companies that hold shares in or on behalf of subsidiary companies may be able to recover VAT depending on the purpose of the shareholding.

“However, basic shareholding as an investment, for instance, is not considered an economic activity. It is important holding companies have a firm grasp of these rules.

“Those which do not satisfy HMRC’s ‘economic activity’ specifications, for instance by making management charges to subsidiaries, but still recover VAT associated with holding shares could become exposed.”

HMRC’s new guidance also assists businesses in deciding when VAT can be recovered on deal fees, for example share acquisition or disposal and sale of businesses.  

Mrs McCaldon-Gower said it is very important to seek specific VAT guidance on deal fees early to ensure that full VAT recovery is possible.

 “This again is an area which is fraught with complexity,” said Mrs McCaldon- Gower. “In most cases, it is not enough that the buyer or seller is fully VATable to allow VAT recovery on deal fees. These are areas where mistakes are still being made.

“It is essential to have a comprehensive and professional management plan for pre, during and post any deal process. The VAT recovery element is of course fundamental to this.”

For more information about any aspect of VAT, please contact our VAT manager, Gemma McCaldon-Gower via email: gemma.mccaldon-gower@mitchellcharlesworth.co.uk or simply complete a quick enquiry form and we will be happy to contact you directly.

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