Potential VAT opportunities for UK holding companies in the offshore maritime sector
There is some good news for holding companies in the offshore maritime and oilfield services sector that may result in potential significant VAT savings. This follows a recent announcement by HMRC.
HMRC had been increasingly challenging VAT recovery made by holding companies even where they fully support subsidiaries in the group who are able to recover all of the VAT that they incur. This was on the basis that HMRC had held the view that holding companies were not carrying out ‘business’ or ’an economic activity’ for VAT purposes.
The following typical holding company functions do not in themselves carry a right to recover VAT incurred on related costs:
• holding/acquiring/disposing of shares;
• receiving dividends;
• carrying out listing activities;
• raising finance etc.
This is because, for VAT purposes, they are not ’business’ activities.
However, in reality, many holding companies undertake a much wider function on behalf of the subsidiary companies in the group. For example, the holding company may employ the staff and directors, and also hold the property interests and be responsible for the procurement of all the necessary resources for support and administration of the subsidiaries. In this instance, the holding company would be providing services and making supplies to its subsidiaries that are quite clearly ’business’ for VAT purposes.
Even when this is the case, or where a holding company is part of a VAT group which is fully taxable for VAT purposes, HMRC had still been expecting some VAT incurred on expenditure to be restricted to reflect the ’pure’ holding company activities being undertaken.
At the end of last year, HMRC announced that it is revising its policy with regard to VAT recoveries made by holding companies, and will be taking a more relaxed view. The issue of what VAT can be recovered by a holding company has been the subject of significant case law over many years, with the Courts not agreeing with many of HMRC’s arguments.
HMRC last announced its policy in September 2014, and at that time, HMRC said that it would be looking much more critically as to how costs were being ’used’ by the holding companies. Importantly, it said that it would be expecting some sort of disallowance to be made in respect of VAT recoveries to reflect pure holding company activities.
Since that time however, some high profile VAT cases have been heard at the Court of Justice of the European Union, and the results of these have indicated that HMRC’s view is too restrictive. As long as the holding company is providing genuine services to its subsidiaries, then it should be possible to recover VAT incurred on expenditure (i.e. including ’pure’ holding company activities) and not make any restriction.
We understand that HMRC is withdrawing from some of the ongoing litigation, and is in the process of drafting guidance setting out their revised views.
Corporate groups should be actively reviewing the arrangements that they have in place for their holding companies and how they treat the VAT incurred. Also, if any restriction has been, or is being made, it may now be possible to recover this VAT, and potentially make a claim for any VAT that has not been recovered or disallowed by HMRC to date.
This is likely to be of particular relevance to groups supporting the offshore maritime and oilfield services sector. The sector is facing extremely adverse market conditions at present and it will therefore be very important for groups to ensure that they are reclaiming all possible VAT and that no unexpected VAT liabilities arise.