Background
One of the main features of the VAT regime in the European Union (EU) is the VAT invoice, as this is the main tax document that determines when VAT has to be accounted for. It is also the primary document for a business to determine when it is entitled to recover what it has been charged. Historically, the invoices have been in paper form and the rules governing their content and issue have reflected this. However, increasingly businesses have been adopting electronic invoicing and although the VAT Directive provided for electronic invoicing the rules were more restrictive and not consistent across the Member States. In order to address this issue the Council of the EU has adopted a Directive aimed at simplifying the VAT invoicing requirements in particular as regards electronic invoicing.
Summary of the UK Budget delivered by the chancellor on 22nd June 2010
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Background
The recovery of VAT on deal costs has for many years been a source of dispute between taxpayers and HM Revenue & Customs. This has led to much litigation over the years, with the last few months seeing two high profile cases, both of which resulted in victory for the taxpayer. Although HM Revenue & Customs has already launched an appeal in the first case, and are likely to do so in the second, taxpayers and their advisors should be considering the implications both for deals done in the past and those currently underway.
Viability Studies
The first case that was dealt with in 2009 by the Tribunal, concerned the recovery of VAT on a viability study commissioned to provide information to a prospective lender. The case was taken by My Travel Group (now Airtours Transport Limited), who had been having financial difficulties and needed to restructure their borrowings. Under a tripartite arrangement with a bank and a third party advisor, a viability study was prepared with the advisor invoicing My Travel for the work rather than the bank. My Travel successfully argued that under the principles established by the much earlier Redrow case, it paid for the viability service to be supplied to it and the bank.
As the primary purpose of commissioning the study was to ensure that My Travel could continue to trade and make taxable supplies, it was entitled to recover the VAT in full. HM Revenue & Customs had argued that the supply was made to the bank, with the benefit to My Travel being ancillary. HM Revenue & Customs has appealed against this decision.
Fees incurred by Acquisition vehicle.
The second case concerned the acquisition by Spanish infrastructure group, Ferrovial, of the UK airport operator BAA Plc. As is the case with most large acquisitions Ferrovial set up a new vehicle, NEWCO, to make the acquisition, and NEWCO incurred numerous fees from advisors on which it incurred VAT. Once the acquisition was completed, NEWCO joined the BAA VAT group, though there was a two month gap between the completion of the acquisition and NEWCO becoming a member of the VAT Group.
HM Revenue & Customs argued that the VAT incurred on advisers fees (by NEWCO), was a direct cost of the finance it raised and did not relate to any taxable supplies made by the BAA VAT group.
The Tribunal, however, accepted the argument that NEWCO, as the holding company for BAA, always intended to provide management, strategic advice, corporate governance and financing services to BAA. It was, therefore, carrying on an economic activity from its inception, despite the fact it did not make any charges to its subsidiaries before becoming a member of the VAT group. The Tribunal also concluded that as NEWCO was a member of the BAA VAT group they were a single entity for VAT purposes and the taxable supplies of BAA could be imputed to NEWCO.
Way Forward
The two decisions of the Tribunal provide guidance on a number of technical issues which taxpayers need to be aware of when considering the recovery of VAT on deal costs. Consideration should now be given to the recovery of VAT incurred in the past and the structure of deals in the future, whilst continuing to monitor the further litigation there will be in respect of these cases.