Have you carried out a VAT health check on your holding companies?
HMRC is continuing its targeted campaign to review the VAT position of holding companies in the natural resources sector. Holding companies are being asked to prove that they are entitled to earn VAT repayments and maintain VAT registrations. Many of the holding companies have failed which has led to a flurry of assessments and ongoing litigation (see Norseman Gold, African Consolidated Resources and W Resources).
A review of your fact patterns to identify strengths and potential areas of vulnerabilities is therefore recommended. Where there are potential weaknesses, you should address these in anticipation of any potential challenge from HMRC. HMRC can claw back any VAT payments going back 4 years with interest and penalties.
We, BDO’s Natural Resources team, have been at the forefront of advising many Natural Resources holding companies with these VAT issues and resolving such VAT disputes with HMRC (including informal negotiations and mediation).
Why VAT reviews matter more to Natural Resources holding companies?
Due to the inherent nature of Natural Resources activities, the business model is such that when subsidiaries “strike gold”, their holding companies earn significant returns. Many holding companies do not earn revenues until their subsidiaries do strike gold and there is often a long lead time between a holding company providing support services and the actual payment for those services.
The holding companies bear an element of risk as there can be no definite assurance as to when or if they will receive returns and how much such returns may be. It is also common for holding companies not to have any formal written arrangements in place with their subsidiaries concerning the supply of services. Even where there are agreements in place, the contractual terms and the wider relationship may not be commercial as the parties are within the same corporate group structure.
From a VAT perspective, this has raised significant issues.
HMRC considers that under such circumstances, most holding companies do not satisfy the business tests from a VAT perspective. HMRC does not believe they should be entitled to VAT repayments and should not be VAT registered.
Many holding companies have not been able to defend their position. Further, whilst each case is very fact specific, to date, the Tribunal has supported HMRC’s position (see cases of Norseman Gold and African Consolidated Resources).
However, in a recent Tribunal case of W Resources, the taxpayer was partly successful. In this case, the Tribunal decided that the taxpayer was entitled to VAT repayments to the extent the input tax relates to supplies covered by the raising of invoices.
This decision was based on its own specific fact pattern. It is unlikely that HMRC will now accept that simply invoicing for services will automatically mean that the holding company has full input tax recovery. Each holding company would need to demonstrate, with evidence, that it is satisfying the relevant VAT tests by operating under a commercial framework.
Further, it is possible that the W Resources decision may be appealed to higher courts.
Considering the contentious environment that the Natural Resources holding companies are operating in, doing nothing is not an option. Businesses should take steps to assess the potential impact and to address any potential weaknesses.
Please speak to our Natural Resources VAT specialists Stephen Kehoe and Aditi Hyett for further information.
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