Private equity firms are facing a massive blowout after a VAT ruling that could see them being charged Value Added Tax (VAT) on their fees.
A tax tribunal judgement on Ferovial’s purchase of the airport operator BAA could end up costing those involved in mergers and acquisitions and restructuring, hundreds of millions of pounds.
BAA was recently successful in their First-Tier Tax Tribunal, where the company set out to recover VAT incurred from its acquisition by Ferrovial – the Spanish infrastructure company that bought control of BAA in 2006 for a staggering £10.6 billion.
However, the upper-tax tribunal instead went in favour of HMRC’s VAT appeal, ruling against Ferrovial and BAA.
The tax tribunal focused on negotiations between Ferrovial and third parties to secure financing, before and after the BAA takeover.
Ferrovial also joined the BAA VAT group, which claims the VAT incurred on costs associated with the airport operator takeover.
VAT charged by accountants, lawyers and financiers can normally be claimed back by companies, at a later date.
However, Ferrovial used a special company, called ADIL, as a takeover vehicle to purchase BAA.
HMRC argued that ADIL was never really ‘in business’ and that there was no direct link between costs incurred by ADIL in raising funds to acquire BAA, and any supplies made by the BAA VAT group that would qualify for VAT.
In other words, the VAT that Ferrovial began to incur on services prior to acquiring BAA, could not be claimed back following Ferrovial’s registration with the BAA VAT group.
Although the tax tribunal went in favour of HMRC’s appeal, it also stated that takeover vehicles could in fact recover VAT if structured correctly; which is what Ferrovial failed to do with ADIL.
Kevin Kinsella Jnr, of KinsellaTax, said:
“Although HMRC may not have won all of their arguments in court, the Revenue won’t have been discouraged from pursuing similar cases on mergers and acquisitions.
To avoid what has happened to Ferrovial, a formal company record must be kept to support a business and development companies (BIDCO) intention to register for VAT, and the takeover vehicles role in the acquisition or merger of a new corporate group.”
HMRC and the British Venture Capital Association have met to discuss VAT on deal fees, with the hopes of hundreds of similar cases in their flight path.
Commenting on results of the tax tribunal, a spokesman for HMRC said:
“We are pleased that the Upper Tier Tribunal has confirmed HMRC’s policy that a business can only recover input VAT if it makes taxable outcome supplies.”
BAA was hoping to recover £6.7m in the case and is yet to appeal.
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