Holding Company Services To Subsidiary

VALUE ADDED TAX – holding company providing services to subsidiaries – whether FTT failed to make complete findings of fact – whether supplies were made for consideration – whether supplies amounted to an economic activity

In the Upper Tribunal the case of Revenue and Customs v Tower Resources PLC [2021] UKUT 123 (TCC) (20 May 2021) considered whether supplies were made by a holding company to subsidiaries.

HMRC’s appeal was dismissed largely because the UT was unwilling to disturb the findings of the First-Tier Tribunal but nevertheless the principles on intercompany cross charges flagged up some interesting points of law.

It is well-established that in analysing a transaction for the purposes of VAT, while the contractual arrangements are the starting point they are not determinative, and it is necessary to consider whether those terms reflect the economic and commercial reality of the transaction.

For the purposes of Article 2(1) PVD, there must be a direct link between the service supplied and the consideration received: Lebara v R&CC (Case C520/10) EU:C:2012:264, [2012] STC 1536, §27. This direct link may be broken if there is no more than a “vague intention to levy an unspecified charge, at some undefined time in the future” by way of consideration for services supplied by a parent company to its subsidiaries: Norseman Gold v HMRC [2016] UKUT 69 (TCC), [2016] STC 127, §§94 and 119–121.

54. The FTT has also, on several occasions, considered the situation where the fees charged by a parent company to its subsidiary were conditional on the subsidiary having the means to
pay. In African Consolidated Resources [2014] UKFTT 580 (TC) where management fees were provided by the parent to its subsidiary for an annual fixed fee of £10,000, which was set
at a level which the subsidiary could afford to pay rather than by reference to the value of the services provided, the FTT considered that there was insufficient evidence of an economic link between the value of what was provided and the price being charged. On that basis it held that those services were not provided for valuable consideration and so should not be treated as taxable supplies by the parent company (§§64–65).

55. More recently in W Resources [2018] UKFTT 746 (TC) the FTT considered a situation where the parent company was only entitled to invoice its subsidiaries once they had started to
generate revenue. After referring to the decision in African Consolidated Resources (as well as the Norseman and Bastova judgments), the FTT held that:
“the case law in this area clearly demonstrates that any contingency which has the result that the recipient of a supply will not be required to pay for the supply if it lacks the means to do so is enough to mean that there is no ‘reciprocal performance’ by the parties and therefore breaks the ‘direct link’ which is required in order for the relevant supplies to be ‘for a consideration’.”

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