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July 09, 2020

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VAT Recovery for Holding Companies - UK

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.

© 2020 Proskauer Rose LLP. National Law Review, Volume VII, Number 136

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About this Author

Stephen Pevsner UK Tax law partenr Proskauer Rose private fund formation eorganisations, structured finance, investment funds
Partner

Stephen Pevsner is a tax partner and a member of the Private Investment Funds and Private Equity M&A groups. Stephen's practice covers the broad range of corporate and individual tax advice, with particular emphasis on private fund formation across a wide range of buyout, debt and infrastructure asset classes, as well as UK and international M&A transactions (often private equity backed). He has wide experience in corporate reorganisations, structured finance, investment funds and new business set-ups, and also advises regularly on a wide range of employee and fund manager...

44.20.7280.2041
Robert Gaut, Proskauer Rose, UK Tax Lawyer, Investment Attorney, Finance
Partner

Robert Gaut is a tax partner and head of our UK tax practice in London.

He has represented many of the world’s preeminent multinational corporations, sovereign wealth funds, investment banks and private equity funds on a full range of UK and international tax strategies relating to inbound and outbound transactions, capital markets offerings, establishment of investment funds and financing matters.

Recent representative transactions include:

  • Advising Ares Management LP, the leading global alternative asset manager, on the international tax aspects of its initial public offering, raising US$216 million in the first IPO by a major private equity firm since the Carlyle Group went public in 2012

  • Advising Virgin Media in the tax aspects of its US$23.3 billion acquisition by Liberty Global

44.20.7280.2064
Catherine Sear, Proskauer, Private Investment Funds Lawyer, Tax Legislation Attorney
Partner

Catherine Sear is a partner in the Tax Department and a member of the Private Investment Funds Group.

She focuses on the tax aspects of private investment fund structuring, including the structuring of carried interest and executive co-investment arrangements as well as tax issues relating to the establishment and operation of fund management businesses. She provides advice to fund managers on the tax aspects of private equity, venture capital, infrastructure, real estate and debt funds, including funds of funds, and has particular experience of...

4420-7280-2061