Holding Company and its right to deduct – two establishments
Steve McCrindle
by Steve McCrindle
I have a client dispute that is going on appeal to Alternative Dispute Resolution (ADR) and if that does not provide an acceptable remedy, it will proceed to the First-Tier Tribunal (FTT).
Client is a UK holding company with a portfolio of overseas subsidiaries to which it supplies services. Some of the portfolio companies are live and some are dormant. Client incurs VAT in respect of its provision of services to most of the subsidiaries, but predominantly in respect of the live ones. The VAT Client incurs in this respect is recoverable if it is a cost component of a supply by it to a subsidiary(s) and is irrecoverable if there is no supply by Client to a subsidiary(s), a pro-rata to be applied where VAT incurred relates to both categories of subsidiary or neither category of subsidiary. Client is UK VAT registered (but not as part of a VAT group registration/Fiscal Unity) and recovers most VAT incurred as input tax attaching to its supplies outside the scope of UK VAT with recovery (so called OSr supplies).
The dispute with HM Revenue & Customs (HMRC) has arisen as they believe that a significant sum of VAT incurred (input tax), circa GBP 1.4 million, recovered is not recoverable, which we dispute. Hence the litigation.
Client is now also in a formal Liquidation process.
We/HMRC contend that:
HMRC are disallowing input tax relating to costs incurred by Client forming a cost component of its services chargeable to an entity established in the British Virgin Islands (BVI), but as yet it has made no supplies to the BVI such that input tax is not recoverable in this respect;
Client makes the vast majority of its OSr supplies to a taxable person with a fixed established in the Cameroon and the substance of this transaction(s) is not in dispute;
However, HMRC fail to recognise that the BVI and Cameroon are the HQ and a Branch respectively (in VAT parlance, an establishment and fixed establishment) of the same single taxable person;
Even if they do acknowledge item 3, they are treating the HQ and Branch as separate taxable persons without the vires to support this stance; and
Regardless, even if they are correct to treat the HQ and Branch as separate taxable persons, they have failed to acknowledge that the there was an intended supply to the BVI HQ (which can be proven) that was frustrated by Client’s Liquidation, a matter which was unwanted and wholly outside of its control. As such, the findings of the CJEU in the case of Ghent Coal Terminal (C-37/95) are fully in point and so still Client should be allowed to retain recovery of the input tax it claimed.
It was determined in the CJEU cases involving Skandia (C-7/13) and Danske (C-812/19) Banks that intra-entity supplies (e.g. HQ-to-Branch, Branch-to-Branch, etc.) and VAT grouping, that a VAT group was a new and separate person, distinct from its members and that supplies into a VAT-grouped Branch from an overseas HQ and vice versa were subject to VAT.
However, there is no VAT grouping in play in my Client’s case and so these cases do not impact and regardless, the UK has historically seen Branches of the same legal entity as one taxable person. This being the case, HMRC treating the Client HQ and its Branch as two separate persons is wrong in principle.
It appears that in the case of our Client HMRC are moving the goalposts in respect of how it views supplies to one taxable person, namely, in seeking to disallow our Client’s input tax incurred attaching to its supplies to one Branch and allow it as it attaches to a second Branch of that same taxable person. If HMRC win this argument, VAT recovery for UK Holding Companies will be more difficult going-forward than it already is. If we win this argument, we will have a very happy Client.
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With over 40 offices around the UK, Haines Watts is a UK Top 20 firm of Chartered Accountants specialising in the owner-managed business sector. Assisting over 25,000 business owners around the UK, Haines Watts supports business owners’ aspirations and help them to achieve their goals.
Steve McCrindle is a VAT Consultant at Haines Watts, a leading provider of business advice and accounting services to owner managers operating in the UK and abroad. He is also Global Chair of the GGI Indirect Taxes Practice Group. Contact Steve.
