By Max Clarke

BAA have lost their appeal to recover VAT costs incurred after their forceful divestment of Gatwick airport.

The London headquartered transport giant, that was recently acquired by a consortium headed by the Spanish Groupo Ferrovial, currently operates 6 airports across the UK, including Heathrow. The Group had been ordered to sell Gatwick, and most recently Stansted following a ruling by the competition commission over allegations of monopolistic practices.

It was these forceful sales that gave rise to the current VAT dispute.

The issue concerned the timing of a sequence of events surrounding the takeover of BAA by Airport Development Investments Limited (ADIL). Prior to the takeover, ADIL entered into negotiations with third parties to secure finance, and these discussions continued after the takeover. In the intervening period, ADIL joined the BAA VAT group and the VAT incurred on various costs associated with the takeover was claimed by the VAT group.

HMRC challenged the recovery of the VAT on the grounds that it related to investment costs incurred by ADIL in raising finance to acquire BAA, and that there was no immediate link between the supplies on which the VAT was incurred and any VATable supplies made by the BAA VAT group.

The Upper Tier Tribunal found that ADIL had no intention of making a taxable supply at the time the VAT was incurred and therefore could not rely on the VAT grouping provisions to assist its cause. In order for a business to reclaim VAT, the tax must form a cost component of a taxable supply. The Tribunal agreed with HMRC that there was no direct and immediate link to an onward taxable supply and therefore the VAT could not be reclaimed.

Lorraine Parkin, Head of Indirect Tax at Grant Thornton UK LLP says “This is an important decision for any business involved in an acquisition or merger. The Tribunal did not accept that ADIL was carrying on an economic activity which spanned the completion of the acquisition of the BAA group of companies. As such, the VAT on services that ADIL started to incur prior to joining the VAT could not be reclaimed under its subsequent VAT group registration with BAA.

Parkin adds “An important feature of this decision is that ADIL did not have any evidence to support its intention to join the BAA VAT group or to make any taxable supplies. Businesses involved with this type of transaction would therefore be wise to think about the VAT implications at an early stage. My advice to clients is that a formal company record should be kept about any intention to register a bidco for VAT and the role that it will play in the management of the new corporate group.”

Join us on
Follow @freshbusiness