Basically HMRC disallow Input VAT relating to Investments.
The most well known example of this was when BAA purchased Airport Development Investments Limited in June 2006, the decision was upheld by the Court of Appeal in February 2013.
The BAA VAT group sought to recover the VAT (£6.7m) incurred on the acquisition costs but recovery was refused by HMRC on the basis that they considered ADIL had not made onward taxable supplies, had not demonstrated any intention to make taxable supplies and was not a member of the VAT group at the time costs were incurred.
BAA used an SPV (Ferrovial) to purchase ADIL but did not bring the SPV into the BAA VAT Group until September 2006, 3 months after the acquisition.
The lessons to learn from this are:
- Once you have successfully made the acquisition join a VAT Group immediately and make it clear in correspondence that the SPV intends to join the VAT Group at the earliest opportunity
- Consider not using an SPV
- Buy the Assets instead of the Shares
- Show that the SPV will make taxable management charges
- Consider the scope of the advisors work, HMRC may disallow advice focussed on passively holding shares