On 3 May 2018 Advocate General (AG) Kokott of the Court of Justice of the European Union (CJEU) delivered a significant opinion, which is good news for companies attempting to acquire other companies in the same sector.
The aborted attempt by Ryanair to acquire Aer Lingus is the backdrop to the opinion. The fact that the deal was aborted does not in itself affect whether VAT is deductible. The key issue is whether the proposed acquisition is more than just an investment activity and is a way of a company extending its taxable business operations.
The following is an extract from HMRC policy in the 15 May 2017 edition of VAT Manual VIT40600:
If the shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company, the VAT incurred may also have a direct and immediate link to taxable supplies and be recoverable.
- A retail company incurs costs acquiring a subsidiary whose main asset is a property from which the retail company intends to trade. In these circumstances the acquisition of the shares may be an extension of the retail business rather than an investment. If this is the case, the costs of acquisition are likely to be cost components of the retail supplies to be made from the property. The shares were acquired in order to obtain the property for the retail business. The VAT incurred will be recoverable to the extent that the retail supplies are taxable.
- A business acquires a direct competitor, a similar and complementary business or a key supplier/customer with a view (as the case may be) to increasing market share, achieving economies of scale, or achieving efficiencies through greater integration of its supply chain.
In the above examples the shareholding is a direct, continuous and necessary extension of the existing business activity. There is no need for a specific supply (e.g. management services provided to the acquired business) to link the VAT costs to the existing economic activity.
This is to be contrasted with:
- A company which purchases a business as a free-standing enterprise with a view to making money on dividends or an eventual sale.
In the first two examples the buyer is buying to strengthen its business, but by contrast in the above example there is no direct link between the acquisition and its own business and the acquired business does not itself benefit by being part of a larger, similar operation.