VAT ruling could affect mergers and acquisitions

An upper tribunal VAT ruling against BAA could affect any business involved in M&A transactions. BAA had been successful in the first-tier tribunal when it sought to recover VAT incurred following its acquisition by Airport Development Investments (ADI). However, the upper tribunal accepted HMRC’s appeal.

The case centred on negotiations between ADI and third parties to secure financing. The negotiations began before the takeover and continued after it. ADI joined the BAA VAT group and the group then claimed the VAT incurred on various costs associated with the takeover. VAT charged by advisors on a deal can normally be claimed back later by companies.

However, HMRC argued that ADI, which is owned by Ferrovial, was never really in business. It claimed that the VAT incurred was related to investment costs incurred by ADI when raising the finance to acquire BAA and that there was no immediate link between the supplies on which the VAT was incurred and any VATable supplies made by the BAA VAT group.

Laurence Whitehead, corporate finance principal, comments: “For any business looking at M&A transactions, this is potentially a very important decision by the upper tribunal. In essence, the tribunal did not agree that ADI had been carrying on an economic activity which spanned the completion of the BAA Group acquisition. Consequently, the VAT on services that ADI started to incur prior to joining the BAA VAT group could not be reclaimed under its subsequent VAT group registration with BAA because ADI apparently had no evidence to support its intention to join the BAA VAT group or to make any taxable supplies. It is recommended that a company keeps a record of any intention to register a Bidco for VAT and also to record the role that the Bidco will play in the management of the new corporate group post completion of the deal.”

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