Revenue & Customs Brief 32/14
It’s normally understood that if you are registered for VAT and make only taxable supplies, you can recover VAT on all of your costs, subject to certain exceptions such as car purchases, certain entertaining costs etc. HMRC recently confirmed that VAT on acquisition costs can’t be recovered, even if the businesses acquired make taxable supplies. See Revenue & Customs Brief 32/14: http://tinyurl.com/plcjnj3.
The reason for this is one of the fundamental VAT rules; i.e. that in order to claim VAT on costs, the costs must be attributable to taxable supplies made in the course or furtherance of a business. Because the acquisition and ownership of shares itself isn’t regarded as an “economic activity”, then the VAT on the shareholders’ costs can’t be recovered.
Example
And it doesn’t just apply to larger businesses. Imagine this scenario: a couple sets up a limited company. The purpose of the company will be to acquire retail businesses. They find a business they want to acquire and the owner is willing to sell, so they agree on terms and purchase the shares in the company. The whole process takes a few months and they incur various costs, including legal and accountancy fees in the meantime.
They decide to set up a VAT group registration and set this up as soon as the acquisition is completed. They assume that they can claim the VAT on their acquisition costs, but HMRC inform them that VAT on “holding company” costs can’t be recovered, referring them to the recent judgement of the European Court of Justice in the case of the British Airway Authority Plc “BAA”.
There are many implications of this ruling It is, however, one of those issues that is challenged by businesses and there are currently two other cases about VAT on holding company costs awaiting judgements at the ECJ, which could affect HMRC’s policy. Either way, I think that HMRC won’t be easily convinced to change their policy, so for the time being they will follow their stated policy. Keep an eye out for developments relating to this issue.