Deeks VAT News Issue 6

Keeping you up to date on VAT Changes

Deeks VAT News

Keeping you up to date on VAT changes

 Issue 6                                                                                                                    30 July 2019

Welcome to the latest edition of Deeks VAT News.

In this week’s issue we look at the following areas:

  • Tower Resources Plc – Holding company and economic activity
  • Newmafruit Farm Limited – VAT on professional fees incurred in bringing litigation
  • 5 Important Tips to Avoid Paying too much VAT 

Tower Resources Plc – Holding company and recover of input tax

The First-tier Tribunal (FTT) has released its decision in this case concerning an appeal against assessments raised by HMRC denying VAT recovery by Tower Resources Plc (Tower) on the grounds that it did not make taxable supplies for consideration. In an amended statement of case, HMRC also argued that if Tower was making taxable supplies, it was not doing so in the course of an economic activity.

Tower is a UK VAT registered holding company, which acquires licences to explore for and produce oil in sub-Saharan Africa. The activities of preparation for drilling of the wells which both discover and produce the oil in each country are conducted through local subsidiaries, this is often a legal requirement of the country concerned but there are advantages in such an arrangement even if this is not the case.

Tower is a signatory and guarantor of a licence, that usually negotiates its terms before a subsidiary is established and which subsequently provides the bulk of technical services and funds the local costs. In addition, Tower has at least one director in common with its subsidiary and the chief executive officer of Tower is always a board member of each subsidiary.

The provision of technical services and payment of local costs by Tower is charged to the subsidiary, not by the issue of an intercompany invoice to be paid by the subsidiary, but through the addition of such sums to the balance of the intercompany loan accounts.

HMRC was unable to locate any written loan or service agreements between Tower and its subsidiaries and concluded that there were none – Tower advised that there were agreements but they could not be located for the period in question. Agreements were however provided for later periods.

The FTT firstly considered whether at the relevant time there was an agreement between Tower and its subsidiaries for the provision of services and/or loans and, if so, the terms of those agreements. In this regard the FTT concluded that although not in writing, agreements did exist between Tower and its subsidiaries under which Tower provided services and met expenses of the subsidiaries for which they were charged. The sum concerned was added to the intercompany loan which was repayable on demand, thereby reflecting the commercial and economic reality of the relationship between them.

As to whether Tower made supplies for consideration, the FTT noted that Tower not only intended but did charge its subsidiaries for the services that it provided to them. There was a legal obligation on the subsidiaries to make payment on demand in relation to the intercompany loans, the fact that it was not discharged does not mean that there has not been consideration for the relevant supply. As such Tower did make supplies to its subsidiaries for consideration.

Finally, the FTT considered whether Tower made supplies in the course of an economic activity. The FTT noted that this requires a wide ranging, not a narrow, enquiry in which all the objective circumstances in which the goods or services are supplied must be examined. This does not include subjective factors such as whether the supplier is aiming to make a profit. Whilst HMRC asserted that the services provided by Tower were not provided for the purposes of obtaining income, the FTT disagreed, finding that a holding company supplying services to its subsidiaries for consideration must lead inexorably to the conclusion that the holding company is also carrying on an economic activity.

Comments:Recovery of VAT by holding companies continues to be an area of focus for HMRC, any business challenged should seek advice as it can be a complicated area requiring assessment of facts against a number of recent cases. Careful planning can also protect the businesses position from potential future challenge. This decision goes against HMRC’s established position of requiring written evidence of management type services, regular invoicing, and supplies – whether management services or interest-bearing loans – requiring cash settlement to be genuine. However, being FTT, HMRC may consider its impact will be limited and continue to hold to their 2017 guidance.

Newmafruit Farm Limited – VAT on professional fees incurred in bringing litigation

The FTT has released its decision in this case concerning the deduction of VAT on professional fees incurred in bringing litigation.

Newmafruit Farms Limited (NFL) is a fruit farming and packaging business and in 2018 it submitted a Notification of Errors to HMRC. NFL explained that it had accumulated profits for which it did not have an immediate use, and in order to earn interest on its cash reserves had lent them on a short-term basis to unconnected third parties. NFL subsequently had to bring legal proceedings when the loans were not repaid. As a result of these proceedings, NFL had been able to recover partially the loan capital but was unable to recover any interest. In its VAT returns it had not claimed the VAT it had paid on professional services in connection with these legal proceedings and now wished to do so.

NFL asserted that the professional fees were a cost component of its economic activities as a whole and the VAT was recoverable. However, HMRC contend that they were linked to a specific exempt supply (the making of loans) and that NFL had not demonstrated how the VAT was directly linked to its other taxable supplies. Being attributable to an exempt supply the VAT was not recoverable.

The FTT firstly found that based on the evidence before it, NFL did make an exempt supply. There were formal written loan agreements and NFL performed its obligations under those loan agreements by advancing sums to the borrowers. At the point in time when a loan agreement has been entered into and the funds have been advanced by the lender to the borrower, there is an agreement between the parties for reciprocal performance, providing for payment for a supply received. By that point there has been a supply of a loan. The fact that a borrower subsequently defaults on a loan agreement would not retrospectively undo the existence of the loan agreement or the fact of the supply.

Considering whether there is a direct and immediate link between the professional fees incurred in the litigation and that exempt loan, the FTT noted that it is necessary to determine whether the professional fees were objectively a component of the price of the supply of the loans, having regard to all the circumstances surrounding the transactions at issue, and having regard to economic and commercial realities.

Whilst noting that NFL is not generally in the business of providing loans, the FTT could see no reason in principle why the question whether there is a direct and immediate link between an input and an exempt supply should depend on whether the taxable person regularly makes such exempt supplies, or only exceptionally. Also, when a lender supplies a loan, the lender will need to administer the loan until the borrower’s obligations are finally discharged. Any administration of the loan is a cost component of the supply of the loan itself, and the expected costs thereof are typically factored into the supplier’s determination of the interest rate at which the supplier is prepared to make the loan, which is in practice the price for which the loan is supplied.

Therefore, NFL’s costs of bringing legal proceedings for breach of the loan agreement is a cost component of the supply of the loan itself, and there is a direct and immediate link between such costs and that suppl

Dismissing the appeal, the FTT concluded that the professional fees were directly and immediately linked to the making of exempt supplies of loans and the VAT incurred on those costs is not recoverable.

Comments: a specific set of circumstances but a case which demonstrates the importance of considering the VAT liability of underlying supplies and the potential to challenge re VAT recovery. Careful planning and early consideration can ensure appropriate budgetary planning and where appropriate, proper structuring of contracts etc to protect the VAT position/mitigate costs.

5 Important Tips to Avoid Paying too much VAT

One of the most commonly asked questions from our clients is ”how can I pay less VAT?”. Well, we cannot reduce the amount of VAT paid, but we can optimise the amount of VAT recovered.

As well as claiming back as much input VAT as possible under the VAT laws, we must also consider where VAT cannot be recovered (because it is ‘blocked’) and make the proper VAT accounting arrangements for that VAT, HMRC frequently target input tax that has been recovered incorrectly via a business’ VAT return

There are particular types of costs on which VAT cannot be reclaimed regardless of whether a business sells VAT exempt or Standard-rated goods and services. In addition, there are circumstances in which unnecessary irrecoverable VAT costs can arise simply because the conditions required to avoid a VAT charge were not complied with.

5 common problem areas that affect all businesses are as follows:

  1. Business Entertainment

VAT incurred on business entertainment costs for UK customers and contacts cannot be recovered. Business entertainment includes hospitality of any kind (e.g. food and drink, accommodation, tickets to the theatre, concerts, sporting events etc.).

It is worth noting though that VAT can be claimed on staff entertainment, as well as business entertainment provided to overseas customers that is of a reasonable kind and on a reasonable scale.

You can see therefore that it is essential to retain sufficient supporting information on the type of entertainment provided in order to avoid unnecessary investigations by HMRC further down the line.

  1. Car Costs

The VAT rules for expenditure incurred on cars are particularly complex. In general VAT cannot be recovered on the purchase of a car, though there are some exceptions such as the purchase of taxis, driving instruction cars and self-drive hire cars provided they are not made available for private use.

However, if a business leases a car for business purposes it is entitled to recover 50% of the VAT charged. There are also complicated rules for other motoring expenses such as fuel costs, repair costs, private use charges etc. This is an area where it is easy to make VAT errors, so seeking advice could be well worthwhile.

  1. Non-business Costs

VAT can only be recovered on costs incurred for business purposes. Sometimes a business may agree to pay non-business costs, e.g. expenditure related to domestic accommodation, expenditure for the benefit of company directors or proprietors such as personalised number plates, sporting activities etc. It is important to ensure VAT is not reclaimed on these types of costs.

  1. Third-party Costs

There are occasions when a business may agree to pay someone else’s costs, such as the payment of legal costs awarded against the losing party following litigation, payment of a landlord’s costs by a tenant, repair costs for damage to a third party’s property.

In these scenarios the supply was not made to the business paying the bills, so they are not entitled to recover the VAT charged.

  1. VAT incurred on Acquisitions

A UK VAT registered business should not be charged foreign VAT by a supplier on the acquisition of goods from another EU country. However, this is dependent on the supplier obtaining the UK business’ VAT number and showing it on their invoice. If this doesn’t happen then the supplier is required to charge VAT.

In order to avoid suffering irrecoverable VAT on overseas costs unnecessarily it is important to ensure such purchases are identified and the VAT number is provided to the supplier when ordering the goods.

These are just a selection of situations where it is easy to fall into VAT traps. VAT registered businesses need to be alert to potential problem areas and ensure reviews of their VAT processes are undertaken on a regular basis.






Please note that Deeks VAT News is not intended to be a comprehensive guide to every development in VAT. It should not be used as a substitute for specific advice in individual circumstances. Deeks VAT Consultancy Limited cannot accept any liability for any action/inaction as a result of any reliance on Deeks VAT News’s contents.


Deeks VAT Consultancy Limited

Managing Director: Jane Deeks LLB (Hons) LPC CTA

T: 07710 553831        E:

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