Tribunal – VAT recovery on takeover bid

The tribunal recently heard an appeal concerning VAT input tax recovery incurred by a bidder on fees paid in respect of a takeover bid. The recovery of VAT in these and similar situations is complicated. HMRC and taxpayers often take a different view as to the recoverability of VAT incurred on fees. Where the sums are large, as in this case, the parties leave it for the Courts to decide.

In this case the bidder was successful in a takeover bid for a large UK airport operator. Following the takeover the bidder joined the same VAT group as the target company. The representative member of that VAT group claimed recovery of the VAT incurred on fees in respect of the takeover as input tax which formed part of the VAT group’s general overheads. HMRC disputed the input tax recovery, of some £6.7m and raised an assessment.

HMRC contended that the VAT group had no right to claim the VAT incurred on fees relating to the takeover. The crux of the case rested on whether the activities of the bidder company were an ‘economic activity’. Whilst HMRC had no objection to the bidder company joining the VAT group they contended that the purchase of shares in a listed company was not an economic activity for VAT purposes and that there was no entitlement to recover VAT already paid.

The taxpayer disagreed and argued that the VAT on fees relating to the turnover was recoverable as the activities of the bidding company did constitute an economic activity for VAT purposes.

The tribunal ultimately allowed the taxpayer’s appeal and accepted that the bidder company did carry out an economic activity although did not make any taxable supplies in its own right. However, the bidder company was entitled to take advantage of the taxable activities of the VAT group of which it was a member and therefore there was an entitlement for the VAT group to recover the VAT incurred.

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The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.