A recent case from the Upper Tribunal has highlighted the importance of creating robust intra-group management agreements to protect VAT recovery by holding companies. HMRC has won the latest stage in an appeal which looks at whether a holding company has made taxable supplies of management services to its subsidiaries, thereby entitling it to recover VAT on its costs.
The Norseman Gold case
Norseman Gold was the UK incorporated holding company of an international mining group. Its subsidiaries were all located overseas, so were not eligible to join a VAT group registration with their holding company. Therefore, Norseman Gold registered for VAT in the UK as a standalone registration and sought to recover VAT on the various costs it had incurred.
In 2014, HMRC successfully argued at the First-tier Tax Tribunal that Norseman Gold was not entitled to recover this VAT, even though it raised management charges to its trading subsidiaries. The Upper Tribunal has now upheld this decision.
While it accepted that Norseman Gold had actively managed and directed the activities of its subsidiaries, the Upper Tribunal decided that, at the time the input VAT was incurred, there was no direct and immediate link between the costs and the management charges subsequently made to the subsidiaries. At the time the holding company purchased these services, the Upper Tribunal decided that there had been no firm agreement that the subsidiaries would be required to pay management charges or when these would be due. The invoices Norseman Gold eventually issued to its subsidiaries for management services all covered periods after the VAT had been incurred.
What does this mean for holding companies?
It is common for organisations to have less formal arrangements for passing on costs between group companies than they would for arm’s length transactions. However, the Norseman Gold case confirms that, to meet the required standards for VAT recovery, holding companies must be specific about what intercompany charges are to be made and when they will be due.
The decision is based on the exact facts of this specific case, and does not automatically mean that all holding companies making management charges should be denied input tax recovery. However, it sends out a warning to other holding companies to consider their own VAT position. If HMRC thinks a holding company’s input VAT cannot be linked to specific onward supplies of management services, it may try to claw back input tax recovered in the past four years. The potential tax at stake (including interest and any penalties) can be significant.
Since the case first appeared in 2014, HMRC has used Norseman Gold to actively challenge holding companies’ VAT recovery. Although its focus so far has been on the natural resources sector, especially operators with overseas subsidiaries, there is potential for HMRC to target any holding company it feels is making undefined or unenforced charges for management services.
All businesses with a holding company that is separately VAT registered from its subsidiaries should review their arrangements for making management charges (together with any supporting documentary evidence) to establish any areas where HMRC could possibly challenge input tax recovery. If risks are identified, businesses should consider creating clear agreements between the holding company and subsidiaries to protect their position.
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