Company acquisitions : VAT recovery

United Kingdom
In a recent Customs & Excise Business Brief, Customs announced that they do not intend to appeal the recent VAT tribunal decision in Southampton Leisure. This case concerned the extent to which VAT on professional costs incurred by a holding company on the acquisition of a target in exchange for the issue of shares in the holding company to the former shareholders of the target could be recovered as input tax.

Where a purchaser acquires a target company for cash the VAT on professional fees incurred by the purchaser will be regarded as a general business overhead and therefore recoverable in full if the purchaser is fully taxable. Where the purchaser (as in the Southampton Leisure case), issues shares to the seller in exchange for the acquisition of the shares in the target, Customs have for some time sought to argue that professional costs incurred by the purchaser are irrecoverable on the basis that they should be regarded as directly attributable to the exempt issue of shares. These arguments were rejected by the High Court in RAP Group plc v Customs & Excise [2000] STC 980 and the VAT tribunal had no difficulty in following the RAP decision in this case.

The VAT tribunal made it clear that VAT recovery was dependant upon whether the professional costs could be said as a matter of fact to relate wholly and exclusively to the exempt issue of shares. In the Southampton Leisure case an element of the professional costs could be directly attributed to the exempt issue of shares (and was therefore not recoverable) but the major part of the costs were not (and were therefore treated as non-attributable residual input tax recoverable in accordance with the holding company's partial exemption method).

In practice, the greater part of the professional costs incurred by a purchaser on an acquisition of a target in exchange for the issue of shares will relate to the acquisition rather than the issue of shares. Where the purchaser is fully taxable, VAT on these costs will be recoverable in full. Where the purchaser is partially exempt the VAT will be recoverable in accordance with its partial exemption method.

The Customs' Business Brief is welcome in that it signals that Customs have finally accepted that the line they were taking could not be supported.

For further information please contact:

Richard Croker
Corporate Tax Partner
richard.croker@cms-cmck.com
+44 (0)207 367 2149

Mike Boutell
mike.boutell@cms-cmck.com
+44 (0)207 367 2218

Stuart Hale
stuart.hale@cms-cmck.com
+44 (0)207 367 3102