In an important decision for tax professionals, the Court of Appeal has ruled that a company established for the sole purpose of acquiring control of airports operator, BAA Limited, was not engaged in ‘economic activity’ and was thus not entitled to reclaim £6.7 million in VAT on sums paid to professional advisers prior to the take-over.
Airport Development and Investments Limited (ADIL) was incorporated as a special purpose vehicle by the consortium that took over BAA in 2006. ADIL incurred substantial advisory and consultancy fees prior to the acquisition but was not at that time registered for VAT and was thus not a taxable person.
Subsequent to the take-over, ADIL joined BAA’s VAT group and was then registered for VAT. BAA, as representative member of the group, argued that it was entitled to reclaim input tax paid on the professional services supplied to ADIL and set such sums off against output tax incurred on supplies made by BAA in the course of its business.
Her Majesty’s Revenue and Customs (HMRC) assessed BAA for £6.7 million in VAT after disallowing the company’s claim to recovery of the input tax paid by ADIL. The resulting dispute went before the first tier tribunal and the upper tribunal which reached conflicting conclusions.
Dismissing BAA’s appeal, the court ruled that, at the relevant time, ADIL was not engaged in economic activity enabling it to recover the input tax. The company simply existed and acted to acquire the shares in BAA without carrying out any activity that involved the making of actual taxable supplies in its own right and without having formed any intention, prior to completion of the acquisition, to do so or to join the BAA group.
The court also ruled that the input tax was irrecoverable on grounds that there was no direct and immediate link between the professional services supplied to ADIL and the outward supplies made by BAA on which VAT was charged.