On 20 April 2017, HMRC published revised guidance on the extent to which holding companies are able to deduct input tax on costs incurred in acquiring, holding and managing subsidiaries. This follows the decision of the ECJ in Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG (Case C 108/14).

HMRC's position in relation to the recovery of VAT incurred by UK holding companies was significantly out of line with the principles outlined in those cases and the new guidance – that is set out in the updated VAT Input Tax Manual – substantially aligns HMRC policy with the ECJ case law.

In particular, HMRC will no longer require VAT incurred on acquisition-related costs to be apportioned between the non-economic activity of holding the shares in the subsidiary and the economic activity of providing taxable services to the subsidiary. In addition, the stipulation has been dropped that required VAT incurred on the acquisition to be recovered by the holding company within a reasonable period through the onward charging of management fees to subsidiaries. It remains vital, however, that real management services be provided by the holding company for a proper fee. In addition, management fees cannot be structured as contingent upon the profitability of the subsidiaries, as in that case the holding company will not be viewed as engaged in economic activity.  

Buyers are always well-advised to consider VAT planning on acquisitions early in the process and to document management arrangements in a careful manner to maximize VAT recovery opportunities.