The Upper Tribunal has confirmed the decision of the First Tier Tribunal (FTT) in Norseman Gold v HMRC concerning the ability of a holding company to recover input VAT. The decision confirms that it is only where management services are provided for which a fee is properly chargeable that an economic activity will exist. Where management services are supplied but the charge for those services is only set and levied at a later date, without any clear prior obligation, there will be no taxable supply made as those payments by the subsidiary will not be treated as consideration for VAT purposes.
Whether VAT can be recovered by holding companies and bid vehicles is a complex matter, one which requires careful planning and consideration. However, it is clear that a prerequisite in all cases is a precise, mutual understanding that supplies of management services will be made for which a proper fee will be charged.
Norseman was the AIM listed UK holding company of a group of Australian gold mining companies. It incurred director’s fees via the engagement of service companies, as well fees for accountancy and audit, fees on raising finance and Stock Exchange fees. Norseman also provided finance to its operating subsidiaries on an interest free basis.
In 2006, Norseman registered for VAT on the basis that it intended to provide management services to its operating subsidiaries and recharge the cost of such services to its subsidiaries. There was no formal agreement in place with respect to the management services to be provided and no formal agreement regarding payments from the subsidiaries for such services. The subsidiaries were not profit making and so no charges were levied until April 2009 when Norseman invoiced and accounted for output VAT for one VAT quarter. Further invoices were raised on a quarterly basis although none were paid as the subsidiaries did not return to profit.
HMRC denied Norseman’s claims for input VAT recovery. HMRC contended that Norseman was not making supplies of management services and even if it was, there was only an intention to charge for those services if the subsidiaries were able to make payment and as such this was an “optional” charge which did not amount to consideration for VAT purposes.
The First Tier Tribunal accepted that the activities of Norseman were capable of amounting to supplies for VAT purposes. The Tribunal was satisfied that the directors of Norseman played an active role in setting the strategy and direction of the subsidiaries. The test set out in the BAA case that there must be “direct or indirect involvement in the management of the companies in which the holding has been acquired” was met. Therefore, what Norseman provided to its subsidiaries was, in principle, capable of amounting to a taxable supply.
However, the FTT agreed with HMRC that charging and payment for management services in this case did not amount to consideration for VAT purposes, such that Norseman was not carrying on an economic activity. The taxpayer appealed that decision.
Decision of the Upper Tribunal
The Upper Tribunal agreed with HMRC in that the charge for management services did not amount to consideration and therefore Norseman could not demonstrate an intention to make taxable supplies at the relevant time.
Norseman argued that the mere intention that payment should be made in respect of supplies was enough to establish that there was consideration. The fact that Norseman argued that as it had intended to make charges in relation to future supplies based on cost this was sufficient to give rise to an economic activity and make the supplies which were made taxable supplies.
The Upper Tribunal rejected this argument on the basis of two main points: firstly, whether there was an intention to make future supplies for consideration (i.e. taxable supplies); and secondly, whether the supplies actually made were taxable supplies.
The difficulty for Norseman was the absence of any agreement about payment for what was provided. In fact, the supplies which were made were carried out without any mutual understanding of what would be paid, or when, or in what circumstances payment might be made. In this case, there was, as the FTT noted, at most a “rather vague intention to levy an unspecified charge at some undefined time in the future”. This failure to stipulate or agree any consideration “can lead only to the conclusion that there was no obligation to pay for the supplies at the time they were made”. A finding which the Upper Tribunal agreed with. There was no evidence of an intention to make future taxable supplies and on this basis Norseman was not carrying on an economic activity at the time.
The Upper Tribunal also agreed that the supplies which had actually been made, and for which a payment had later been made, did not amount to taxable supplies. Since there was no agreement to make any specific payment for those supplies, the actual payment made and the supplies provided were made gratuitously. Moreover, the actual charges made did not remotely cover the costs of the services, suggesting that the taxpayer’s argument that it intended to recharge its services at cost was inconsistent with the facts.
Accordingly, the Tribunal held that Norseman did not have any intention to make taxable supplies at the relevant time and could not recover the input VAT it had incurred.
The decision reinforces the fact that any agreement to provide management services must be properly documented and the agreement to pay for such services must be clearly set out in advance. Recharging such services at a later date and relying upon on the subsidiaries ability to pay for such services will break the connection between the service and the payment such that any payment made will not amount to consideration for VAT purposes. Therefore the services will not be regarded as an economic activity entitling the holding company to register for VAT.
It is interesting to note that HMRC did not raise further questions as to whether Norseman actually made supplies in this case. The FTT did not place a high evidential burden either on the type of services provided nor on confirming that management services had actually been provided. Therefore, provided that there is proper documentation for charging fees for such services, obtaining a VAT registration as a holding company should not be onerous.
It remains to be seen whether the company will appeal this decision. In the meantime holding companies in similar positions should review their inter-company agreements and business plans to ensure these contain a very clear understanding of what the holding company will provide in the form of management, administration or technical services, how the costs incurred by it will form the basis for the consideration of those services, and that periodic invoices are indeed raised for management services provided.