The decision of the Upper Tribunal (Tax and Chancery Chamber) to overturn the Tribunal below in the case of BAA Limited, to disallow VAT recovery for certain takeover fees, will have come as an unpleasant surprise to those incurring substantial costs on corporate acquisitions. This case related to the 2006 takeover of BAA by the Ferrovial group and the very substantial fees paid to Macquarie and others in relation to that transaction. The decision was based on two finding of facts. The first was that there was never any intention that ADIL, the acquisition vehicle, would charge the target companies for post-acquisition services, although it was understood that such services would be provided. Second, the intention to include ADIL and the target companies in the same VAT group was formed after the acquisition had taken place.

These findings made it difficult for ADIL to identify taxable supplies to which its input tax could be attributed. It was accepted that the strategic nature of the business meant that ADIL was carrying on an economic activity, but to recover the input tax it had to go further than this and attribute the fees to taxable supplies. This case is the story of its attempts to do so. There were a number of different approaches.

The first was to argue that ADIL should recover its VAT without reference to its subsequent joining of the BAA VAT group on the basis that when it received the services, it did so with a view to using them in making its own taxable supplies. This was difficult because the evidence of intention, to be measured at the time when the costs were incurred, did not bear it out. ADIL had not formed any intention to charge BAA for its services until after the takeover had occurred, by which time the services had already been bought in. In any case, however, the court would not have regarded costs incurred on the takeover as being directly and immediately linked to post-acquisition supplies of management services by ADIL. One can only have sympathy with this. A conclusion that the costs of the takeover were incurred in order to enable ADIL to make management charges would be a slightly odd one.

The second approach was to try to link the expenses incurred by ADIL with the supplies made by the post-acquisition VAT group in actually running its airports. There were two main hurdles here. The first was the finding that at the time when the VAT was incurred there was no intention for ADIL to join the BAA VAT group. The position had been very different from that in the ECJ case of Faxworld, where expenses had been
incurred in preparation for supplies to be made by a successor entity. ADIL had no evidence of intention to join the BAA VAT group when it incurred its expenditure. In fact, the difference probably went beyond this. In the case of Faxworld, the purpose of incurring the expenses had been to enable the successor entity to make the supplies. Here, BAA would make its supplies of airport services whether or not it was acquired by ADIL.

Finally, the taxpayer sought to argue that the acquisition of a company was like the acquisition of a business and that therefore VAT on any expenses should be recoverable by analogy. Despite the obvious neutrality of this line, the court held that the two situations were sufficiently different to justify different VAT treatment.

It is not known whether this decision will go to appeal and, if so, how it will be decided. For the moment, bidding vehicles should:

  • ensure that any intention to bring Bidco into the target VAT group is well documented before the transaction and that post acquisition, Bidco immediately joins the VAT group;
  • ensure that any intention to supply management services to the target entities and to charge for them is also documented; and
  • defer the tax point on supplies received so that the time of supply arises once Bidco has joined the VAT group.

This should give the best prospects of recovery in a highly uncertain area.

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