Could mining operations with a UK holding company and overseas subsidiaries lose out on reclaiming VAT? Yes, if they don’t structure agreements in ways that satisfy HMRC, says Robert Facer, a VAT expert at Moore Stephens.
The warning comes in the wake of two recent VAT Tribunal cases involving mining businesses. In both cases, UK holding companies had registered for VAT on the basis that they would be providing management services to their overseas subsidiaries. They then reclaimed VAT on their costs. HMRC challenged both companies, resulting in appeals to the Tribunal.
In the case of Norseman Gold plc, agreements were in place between the holding company and its subsidiaries covering the provision of management services. “The Tribunal didn’t dispute that services were provided, but did question whether the services were provided in return for consideration,” says Robert. “Both components (service and payment) must exist for there to be a supply of a service for VAT purposes.” The Tribunal stated that it did not consider ‘…a rather vague intention to levy an unspecified charge, at some undefined time in the future…’ to be sufficient. “The Tribunal didn’t accept there was a binding obligation for the subsidiary to pay for the services,” Robert says. “It therefore concluded there was no supply of services taking place. As a result, Norseman wasn’t entitled to be registered for VAT and could not reclaim VAT on its costs.”
Similarly, in the case of African Consolidated Resources plc, it was found that the holding company was providing management services. However, a company memorandum stated that payment for the services would be based on the subsidiary’s ability to pay. In effect, the subsidiary would pay a relatively small fixed fee for the services until it had generated some cash. “Again the Tribunal found in favour of HMRC,” Robert says. “The Tribunal decided that there was an insufficient link between the value of the services provided and the relatively small fixed fee that would be charged until such time as the subsidiary could afford to pay more. Accordingly, there was no supply for VAT purposes, which meant that the company couldn’t register for VAT and no VAT could be reclaimed.”
What are the lessons for other mining companies? “It’s important at the outset to think about the terms of the agreement between the holding company and its subsidiaries,” Robert stresses. “What are the intentions for payment for those services? Make sure that your plans for payment are clearly set down and evidenced in a way that HMRC can’t challenge. These cases highlight the need for there to be a pre-agreed and enforceable obligation for the subsidiary to pay a specified amount at a defined time. The value of the payment for the services supplied must also be supportable.”
Looking ahead, HMRC is considering its policy for how VAT applies to holding companies and has said that changes could be made. “This is because a number of cases are working their way through the European Court,” Robert says. “HMRC is waiting to see the outcome, but has traditionally taken a sceptical stance in relation to holding companies and VAT.”
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Energy, mining & renewables