Can a company which incurs VAT on costs incurred which relate to future supplies of management services, register and recover that VAT? This common situation may in the future be the subject of a challenge by HM Revenue & Customs after they won the Upper Tribunal case of Norseman Gold plc [2016 UKUT 69 (TCC)].

Norseman Gold plc (‘Norseman’) is a UK AIM listed holding company which carries out mining activities in Australia through subsidiaries. Norseman incurred VAT on a variety of costs. Norseman registered for VAT on the basis that it intended to charge these costs onto the subsidiaries. The first tier Tribunal held that in theory the services were capable of amounting to a supply giving rise to VAT recovery. However, the failure to agree a price for these services resulted in the Tribunal ruling that the subsidiaries had no obligation to pay for the supplies at the time they were made. Therefore Norseman was not undertaking an economic activity for VAT purposes and was unable to recover any of the input VAT.

The case was then appealed to the Upper Tribunal, which essentially agreed with the First Tier Tribunal’s decision. The Upper Tribunal ruled that there was no direct and immediate link between the costs incurred and intended supplies and no agreement for payment was present when the input tax was incurred.

What does this mean?

This case shows how important it is to agree in advance what management services will be agreed by holding companies and these should be clearly documented in agreements. Any price agreed for such services must reflect the economic cost in order to ensure there is a direct link between the cost and onward supply.

As this is an Upper Tribunal decision it has binding authority and we have already began to see instances where HMRC have sought to challenge the recovery of VAT on costs incurred by holding companies where there is only some kind of vague intention to recharge the costs.

If this is likely to impact your business please be in touch.