Country-specific updates: UK

Tower Resources PLC v HMRC [2021] UKUT 123

In Tower Resources PLC v HMRC [2021] UKUT 123, the Upper Tribunal (UT) upheld the decision of the First-tier Tribunal that an oil and mining holding company charging fees for management services provided to its subsidiaries represented an economic activity for VAT purposes, which enabled the holding company to reclaim input VAT on its costs.

The UT confirmed that the involvement of a holding company in the management of its subsidiaries would be regarded as an economic activity (for the purposes of Directive 2006/112/EC article 9) if the management services were supplied for consideration (within the meaning of Directive 2006/112/EC article 2).

The UT rejected HMRC’s argument that the holding company made no supplies for consideration on the basis the holding company would not demand payments unless the local overseas companies were in funds. The UT stressed that authorities did not go so far as to suggest there could be no consideration if the payment of contractual consideration was subject to any contingency at all.

DLA Piper Comment: The case sets itself within the abundant case law revolving around VAT recovery by holding companies. HMRC’s approach, rejecting VAT recovery when consideration for management services appears to be contingent, on the basis the holding company is not engaged in an economic activity, is questioned in this case. It will be interesting to see if HMRC revises existing guidance on this topic, with the UT explicitly stating that it did not believe that the authorities went so far as to suggest there could be no consideration if the payment of contractual consideration was subject to any contingency at all.

Colin Newell [2021] UKFTT 0199 (TC)

In Colin Newell [2021] UKFTT 0199 (TC), the First-tier tribunal (FTT) upheld a taxpayer’s appeal against HMRC’s decision to restrict his input tax recovery due to the receipt of outside the scope income in the form of payments under the Renewable Heat Incentive (RH) scheme for Northern Ireland.

The taxpayer, whose business consisted of selling dried wood chips (taxable supplies), received periodical support payments under the RHI scheme. HMRC argued that the taxpayer’s business gave rise to his entitlement to RHI payments and, as the VAT on expenditure related to both taxable and ‘outside the scope’ income, there was a proportion of the associated input tax which the taxpayer was not entitled to recover.

The FTT held the taxpayer was entitled to recover all of his input tax, on the basis the fact that he was in receipt of subsidies did not lead to the conclusion that there was a direct and immediate link between the purchases and ‘outside the scope’ income.

DLA Piper Comment: The FTT finding that businesses which make taxable supplies should not be penalised by a VAT recovery restriction, on the basis of the receipt of grants and subsidies, will be a welcomed outcome for businesses and organisations which receive grants and subsidies, in the renewable energy sectors for instance.

Royal Opera House Covent Garden Foundation v HMRC [2021] EWCA Civ 910

In Royal Opera House Covent Garden Foundation v HMRC [2021] EWCA Civ 910, the Court of Appeal (CA) upheld the Upper Tribunal’s (UT) decision that there was no ‘direct and immediate link’ between VAT incurred on production costs and taxable supplies of catering. The taxpayer was therefore not entitled to recover a proportion of that input tax under the partial exemption principles.

The taxpayer sold tickets for opera performances and ballets it staged in its auditorium. The sale of the tickets were exempt from VAT. The charity additionally provided catering services which were taxable. The dispute which led to the decision centred around whether VAT should be recoverable on any proportion of the production costs.

The CA, finding in favour of HMRC, stated that even though it could be argued a ‘but for’ link between the costs and the taxable supplies existed, that is that ‘but for’ the performances and ballets, the restaurants and bars would have no customers, the link did not represent a ‘direct and immediate’ link, which would have entitled the charity to partially recover VAT. It was established that the production costs enabled the charity to make its catering supplies, by attracting customers in its bars and restaurants, but this was not sufficient to establish a ‘direct and immediate’ link.

DLA Piper Comment: The final stage of the Royal Opera House cases will be a disappointment for the theatre industry, which often adopt the same business model and provide extensive catering services during performances. It however helps as a comprehensive guide to the principles inherent to establishing a direct and immediate link between input tax and taxable outputs, an area which is frequently disputed.