VAT & Holding Companies

The First-tier Tribunal’s decision in Victoria Oil & Gas plc looks at how much input tax a holding company can recover when it charges only some of its subsidiaries for management services.
 
VOG was the UK parent of an oil and gas group with licences in Cameroon, Kazakhstan and Russia. Only the Cameroon subsidiary generated revenue, and it was the only one charged for management and administration. A credibility check, prompted by years of repayment returns with no output tax, led to assessments of £884,049. HMRC accepted the supplies to Cameroon, but allowed just 12% of the input tax. That figure came from staff time analyses attached to VOG’s own invoices.
 
The Tribunal held that the assessments were made to best judgment. VOG’s finance team had first told HMRC that the company made no taxable supplies, and the detailed cost breakdown only arrived after the assessment and review. HMRC was not required to do the evidential work VOG had not done.
 
On quantum, the Tribunal could weigh the fuller evidence. Costs recharged to the Cameroon subsidiary were recoverable. So were legal costs on disputes affecting that subsidiary’s business, even where the recharge was deferred until the dispute ended. Legal costs on the Kazakhstan licence were met by a litigation funder, and they failed because there was no evidence of any supply by VOG to the funder. Recovery on head office overheads and corporate legal costs remained at 12%.
 
The Tribunal also rejected the argument that VOG was wholly taxable. Its support for the other subsidiaries came with no charge or expectation of one, so it was non-economic activity.
 
Where a holding company provides services to its subsidiaries, a written agreement should set out what is supplied, how it is priced and when payment falls due, particularly where payment is deferred until a subsidiary becomes profitable. Recharged costs should be traceable to the underlying invoices, and the position on any subsidiaries that are not charged should be understood before HMRC raises it.
 
In this case, the breakdown of costs that persuaded the Tribunal was only produced after the assessment and HMRC’s review, by which point the dispute was already on its way to a hearing.