Comment: BAA loses Court of Appeal claim to recover input VAT on deal fees
In 2006, Ferrovial SA put together a consortium to make a hostile bid for the airport operator BAA plc (now LHR Airports Limited). Its bid vehicle, Airport Development and Investments Limited ("ADIL"), incurred significant deal costs, primarily in connection with services from its professional advisers, during the acquisition process.
Following the successful takeover in June 2006, ADIL provided management services to the BAA group (for which it did not charge a fee) and, in September 2006, joined the BAA VAT group. The representative member of the BAA VAT group subsequently claimed recovery of the VAT on ADIL's deal costs as part of the group's input tax, but the claim was refused by HMRC. BAA appealed against this refusal, initially to the First-Tier Tribunal ("FTT").
In order to succeed in its appeal, BAA had to show that:
- ADIL was carrying on an "economic activity" at the relevant time (when, before the takeover, it incurred a liability to pay for the advisory fees, not when, after the takeover, they were invoiced); and
- there was a "direct and immediate" link between the supplies of services by the professional advisers and the taxable supplies of airport services by the BAA group.
BAA succeeded on both points before the FTT but that tribunal's decision was overturned (on the "direct and immediate" link point) by the Upper Tribunal.
The Upper Tribunal upheld the FTT's decision on the "economic activity" point on the basis that the acquisition of BAA was not an end in itself, but instead the beginning of a phase of onwards investment which was to include the provision of management services to BAA.
BAA appealed the Upper Tribunal's decision to the Court of Appeal which, on 21 February, published its ruling.
Court of Appeal ruling
On the "economic activity" point, the Court of Appeal held that ADIL was not carrying on an "economic activity" at the relevant time. It suggested an "economic activity" had to involve the making or, at least, the intention of making taxable supplies of goods or services. At the relevant time, though ADIL intended to make supplies of management services to the BAA group, there was no evidence that it intended to charge for those services (indeed, it had never charged for them). ADIL's only evident and proven intention at the relevant time was to acquire the BAA group and simply holding shares in a subsidiary is not an "economic activity" for VAT purposes.
That decision was enough to dispose of the appeal. However, the Court of Appeal went on to consider the "direct and immediate" link point, holding that there was no direct or immediate connection between the professional advice provided in relation to the takeover and the taxable supplies of airport services by the BAA group. The professional services supplied to ADIL were only connected with the act of taking over the BAA group. Furthermore, the general rule is that the inputs of one taxable person (in this case, ADIL) may not be treated as the cost components of the supplies of another taxable person (in this case, the BAA VAT group). There is, however, an exception to this general rule where there is a succession for VAT purposes, such as in the case of a transfer of a going concern (Finanzamt v Faxworld  STC 1192). In such a case, the VAT inputs of the predecessor may be treated as having been acquired for the purposes of the taxable supplies of the successor. However, in the present case, BAA was not the successor of ADIL.
Although it is nowhere stated in the Court of Appeal's judgment, it is implicit that, if at the relevant time ADIL had been able to evidence an intention to charge the BAA group for the supplies of management services which it intended to make to the group, and had subsequently actually charged for such services, it would have been entitled to recover the VAT which it paid on the supplies of professional services on a "general overheads" basis (see Cibo Participations SA v Directeur régional des impôts  STC 460).
What does the Court of Appeal ruling mean for other taxpayers?
The Court of Appeal's ruling, therefore, suggests that it should be possible for taxpayers in similar circumstances to ADIL to improve their VAT recovery position by both documenting at the relevant time an intention to make and charge for management services to the target group and actually making and charging for those services after the acquisition.
The Advocate General's decision in the European Commission v Ireland  EUECJ C-85/11 suggests the UK's VAT grouping rules, which allow holding companies to be members of VAT groups, will be upheld by the European Court of Justice. This suggests it should also be possible for taxpayers in a similar position to ADIL to improve their VAT recovery position by documenting at the relevant time an intention to join the target's VAT group.