A recent opinion from the European Courts will, if ratified, affect the recovery of VAT on corporate finance deals and other holding company costs. It could also change the rules on membership of a VAT group registration.

The opinion, issued by the Advocate General (AG) of the Court of Justice of the European Union (CJEU) in a case brought by German shipping business, Larentia + Minerva deals with two important VAT issues:

  • Entitlement to recover VAT on acquisition costs and financing of subsidiaries, and
  • Whether partnerships were eligible to join a VAT group registration.

VAT recovery on acquisition and holding company costs

In the UK, this issue has been the subject of a long running dispute between taxpayers and HMRC. HMRC’s detailed guidance, issued in September 2014, set the bar very high for VAT recovery by holding companies, and many stakeholders disagree with its views. HMRC has pledged to review its policy once Larentia + Minerva has been fully decided in the CJEU and most UK appeals on this issue are currently stood over behind that case.

The AG believes that expenditure connected with capital transactions has a direct and immediate link to a holding company’s economic activity as a whole and so the VAT incurred is recoverable in full, unless the company is partly exempt. Providing a holding company makes taxable supplies (eg of management or administrative services) to its subsidiaries for remuneration, the VAT it incurs on acquisition costs is recoverable and not subject to any ‘non-business’ restriction.

The opinion is very positive for the taxpayer as it clearly states in principle that VAT is recoverable on capital transactions. However, the AG’s comments on the practicalities of demonstrating this (especially on the effects of VAT grouping on the position – the focus of many UK disputes) are more nuanced, and clarification in the final judgment will be welcomed.

Eligibility for VAT group registration

Many businesses are registered for VAT as part of a group registration, which brings a number of benefits, including cash flow savings from the removal of the requirement to charge VAT on intra-group transactions.

One of the UK’s conditions for VAT grouping is that the member must be a corporate body. However, in the AG’s view, EU law only allows member states to impose conditions designed to prevent VAT groups being used for tax avoidance and evasion. The AG believes barring a business from a VAT group solely because of its legal form is unlikely to fulfil this objective, and excluding unincorporated businesses from the benefits of VAT grouping could contravene European rules on fiscal neutrality. 

If this view is upheld in the final judgment, it could vastly widen the scope for the types of entities that will be eligible to join a VAT group in the UK, potentially allowing general partnerships, unincorporated associations and possibly even sole traders to join a VAT group.

The AG says that it should be for the national courts of EU member states to decide whether their country’s law is correct on this point, so it is likely to take some time and further litigation before VAT grouping rules in the UK could be relaxed in this way.

What happens next?

While an AG’s opinion is often a good indicator of how the case may be finally decided, CJEU judgments can, and frequently do, differ materially. It is, therefore, not possible to make a firm assessment of the implications of Larentia + Minerva until the CJEU’s final judgment, which is expected in summer 2015.

Businesses affected by either the deal fees and holding company issue or the VAT group registration issue should seek updated advice on their position and make sure they are ready to consider the impact of the judgment when it appears.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.