The Court of Appeal has handed down its keenly anticipated judgment in a landmark case on the recoverability of VAT on deal fees relating to corporate takeovers.
BAA plc (“BAA”) was acquired by a newly incorporated company (“Bidco”) backed by a consortium of investors. Professional fees were incurred by Bidco in relation to the acquisition. Bidco acquired BAA as part of a longer term strategy to make investments into the airport industry and provide management services to the BAA group (although Bidco did not, at any time, receive consideration for the management services it provided to BAA). Three months after the acquisition, Bidco joined the BAA VAT group.
HMRC refused BAA’s claim, as the representative member of the BAA VAT group, to recover the VAT which Bidco had incurred on the professional fees. The First-Tier Tribunal (“FTT”) allowed BAA’s appeal against this decision, but the FTT’s ruling was subsequently overturned by the Upper Tribunal. BAA then made a further appeal in the Court of Appeal (“CA”).
The Court of Appeal’s decision
The CA decided that BAA’s claim to recover the VAT failed for two reasons. First, Bidco was not carrying on an “economic activity” at the times when it “incurred the liability to VAT” on the professional fees. For these purposes, the time when a liability to VAT is incurred would appear to be when the professional services are actually performed, rather than when a VAT invoice is issued or payment made – although there is still some uncertainty around this point. Bidco’s only proven intention at those times was to acquire BAA’s issued share capital, and the mere acquisition and holding of shares is not an “economic activity” for VAT purposes. Secondly, there was no “direct and immediate link” between the VAT paid by Bidco on the professional fees and the VAT-able supplies made by the BAA group (since Bidco never received any consideration for the management services it provided to BAA, it did not itself make VAT-able supplies with which the VAT on the professional fees could have a “direct and immediate link”). In particular, the fact that Bidco joined the BAA VAT group three months after the acquisition did not mean that the VAT-able supplies made by BAA could be attributed to Bidco to produce the requisite “direct and immediate link”.
Unfortunately, the CA’s reasoning was not completely clear and has introduced some uncertainty as to precisely when an acquisition vehicle must be carrying on an “economic activity”. Moreover, it is not yet known whether BAA has obtained permission to appeal to the Supreme Court; and, in any event, a further appeal would probably take a couple of years to resolve. As such, to maximize the chances of recovering VAT on deal fees, it is important to take advice at the earliest possible stage in the transaction process. In many cases it will be advisable, as soon as possible, to incorporate Bidco and produce evidence that it intends to provide management services (for consideration) to the target group (e.g. in a Board minute). Early consideration should also be given to the inclusion (or anticipation) of Bidco in engagement letters and VAT grouping. However, the best course of action will inevitably vary depending on the nature and precise circumstances of the transaction and the parties to it.
Many appeals concerning the recovery of VAT on deal fees were “stayed” behind the BAA case. Businesses which made an appeal which was “stayed” in this way should, as a matter of urgency, review the terms on which their appeal was “stayed” (in particular, to ascertain the period during which their appeal will remain “stayed” following the decision of the Court of Appeal in BAA) and consider with their advisers how best to proceed. Furthermore, businesses which have successfully recovered VAT on deal fees incurred by an acquisition vehicle in the course of a corporate/share acquisition might wish to address the risk of HMRC challenging this recovery in the light of the Court of Appeal’s decision.