Introduction and Facts

The issue in this case was whether the BAA VAT Group was entitled to an input tax credit claim for VAT charged on the acquisition of professional and advisory services by a company known as ADIL in respect of a take-over bid by ADIL. At the time ADIL made the acquisitions, it was not registered for GST. At first instance, the First Tier Tribunal found that credits could be claimed – [2010] UKFTT 43. On appeal, the Upper Tax Tribunal allowed the Revenue’s appeal – [2011] UKUT 258.

The facts can be shortly stated.

• ADIL was a UK holding and management company used as a special purpose vehicle for a take over completed on 26 June 2006. Bankers and legal advisers made taxable supplies of services to ADIL in the course of a successful bid to acquire the entire issued share capital of the UK airport operator, BAA plc (subsequently known as BAA Ltd).
• The completion of the takeover put ADIL in charge of the strategic and financial direction of the BAA’s group business of running airports in the UK and overseas
• On 22 September 2006 ADIL joined the BAA VAT Group.  BAA, as the representative member of the group, claimed recover of input tax credits of the VAT incurred and paid by ADIL on its acquisitions prior to the acquisition of BAA and joining the BAA VAT Group.

Before both Tribunals the two main questions were as follows:

• First, whether ADIL was carrying on an “economic activity” at the relevant time – ie, when it incurred liability to pay its professional advisers for the supplies connected with the take-over bid. 
• Second, whether there was a “direct and immediate” link between (a) the supplies of services to ADIL and (b) the outward taxable supplies of the BAA VAT Group. This is because the services acquired by ADIL must be “attributable” to onward taxable supplies that are made by, or attributed to ADIL.

The First Tier Tribunal

Some key facts found by the Tribunal are outlined below:

• The services acquired by ADIL were mainly professional and advisory services in the course of the take-over of BAA
• The consequential benefits produced by the take-over continued beyond completion – after the takeover ADIL was put in charge of the strategic and financial direction of BAA’s group business of running airports in the UK and overseas – the acquisition formed part of a continuum of onward investment
• The acquisitions involved management – but in the period between acquiring the shares in BAA and becoming a member of the BAA group, ADIL did not levy any intra-group charges on BAA’s subsidiaries for providing management services
• ADIL said that it had been preparing for, or was otherwise engaged in, activities which were fully taxable and that the services acquired by ADIL were in connection with the take-over and subsequent direction and management of the airport business. ADIL contended that it ought to be able to recover all the input tax credits once registered in its own right or as a member of the BAA VAT Group.
• As for ADIL’s real and relevant intentions, there was no evidence that there was any intention by ADIL, prior to the take-over, to charge for its intra-group services. Although ADIL did have such an intention as from completion of the take-over, no charges were ever made by it.
• There was no evidence of ADIL having an intention, prior to the completion of the takeover, to join the BAA VAT Group.

Before the Tribunal, parties agreed that, in some circumstances, supplies made by one person may be “attributed” to another person.In this context, ADIL relied on the decision in Finanzamt v Faxworld [2005] STC 1192 (Faxworld). In that case, a taxable partnership  was formed solely to establish a corporate entity, to which the business and assets of the partnership would be transferred.  The taxpayer did not intend itself to effect taxable transactions. The partnership was held to be entitled to claim input tax credits because there was a “direct and immediate link” between the services acquired by the partnership and the taxable supplies made by the corporate body.

The Tribunal found that ADIL had carried out an economic activity from its inception, but with the “very important caveat” that ADIL never made a taxable supply in its own right. Nevertheless, the Tribunal accepted ADIL’s submissions that the case was a analagous to Faxworld and concluded that ADIL made the acquisitions in connection with an economic activity it expected to carry on (albeit activities that were ingnored as part of the GST grouping). There was a direct and immediate link between the acquisitions of ADIL and the taxable output of the BAA VAT Group.

The Upper Tax Tribunal

The Upper Tribunal allowed the appeal by the Commissioner. The Upper Tribunal accepted that ADIL was carrying on an economic activity at the time it acquired the professional services, but found that there was no direct and immediate link between those acquisitions and the taxable outputs of the BAA VAT Group. The acquisitions by ADIL were mainly concerned with the take-over and were not for service to be provided by ADIL to BAA or to any company within the BAA Group, although they had a continuing beneficial effect on the group after the takeover. This continuing indirect benefit was too remote to provide the necessary link.

The time to test the recoverability of credits was the time when the acquisitions were made – what mattered was the intention at that time. At the time of the acquisitions, ADIL was not a member of the BAA VAT Group and was found to have had no intention, prior to the takeover of joining the BAA VAT Group. The issue was not resolved by relying on the acquisitions as preparatory acts, because of the absence of a direct and immediate link to an onward taxable supply. The VAT grouping provisions were not retrospective.

The Appeal

The arguments of BAA on appeal can be summarised as follows:

• ADIL carried on one continuous unbroken economic activity from inception to the take over phase and this continuum furnished the direct and immediate link – the Upper Tribunal wrongly divided the activity into a pre-acquisition phase and a post-acquisition phase 
• The acquisitions by ADIL formed overheads of the BAA VAT Group and formed cost components of the BAA VAT Group’s taxable supplies – links to specific supplies were not required to establish direct and immediate links.
• The statutory legal fiction of a single person in the grouping provisions meant that if the VAT Group of which ADIL was a member made taxable supplies, ADIL made taxable supplies.
• On joining the BAA VAT Group ADIL became part of and was succeeded by the single taxable person in the form of the representative member. ADIL’s unused inputs came into the BAA VAT Group and their recoverability takes colour from the outputs of the group. All of the members of the group were carrying on a notional single business. ADIL continued to carry on that business through the medium of the group.
• Cases such as Faxworld show that “direct and immediate link” means “attributable to” and that there is always such a link to the business as a generalised activity viewed as a whole (ie, overheads VAT) as opposed to specifically attributable VAT. That approach enables the court to give effect to the policy of fiscal neuturality that a trader should be able to recover his input tax.

The Court of Appeal found that it was unable to agree with either Tribunal that ADIL carried on an economic activity at the time of the acquisitions. At the time of making the acquisitions, ADIL’s only proven intention was to take over BAA by acquiring its shares – this was an act which would have economic consequences, but that is not the same as carrying on an economic activity for VAT purposes. Those activities did not involve the making of, nor even the intention of making, taxable supplies of goods or services.

The Court acknowledged that there was “in a rather loose sense” a sort of link between the acquisitions by ADIL and the services supplied by BAA. However, it was not possible to describe that link as “direct” or “immediate”. The acquisitions by ADIL were only in connection with the act of taking over BAA and were unconnected with any supply that ADIL intended to make. The onward supplies by the BAA VAT Group were not connected at the relevant date, with the acquisitions by ADIL.

Finally, the Court appeared to put the decision of Faxworld in its proper context, being restricted to where a business was transferred as a going concern (as compared to the acquisition of shares in the company), as reflected in the following observation (at [104) (case references excluded):

The general rule is that the inputs of one taxable person acquired for its own purposes may not be treated as the cost components of the supplies of another taxable person made for its own purposes. Where, however, there has been a transfer of a going concern, the transferee stands for VAT purposes in the shoes of the transferor; and the inputs of the taxable transferor may be treated as having been acquired for the purposes of the taxable supplies of the transferee. In the present case BAA was not the successor of ADIL,and the inputs acquired by ADIL (which was not in any event a taxable person; see above) were not acquired for the purposes of BAA’s taxable supplies.

Comment – the position in Australia

In my view the taxpayer would face similar challenges in establishing that it was entitled to input tax credits under the GST Act.

ADIL would not be able to claim input tax credits because it did not make a creditable acquisition within s 11-5, as it was not registered for GST. It may also questionable whether ADIL  made the acquisitions for a “creditable purpose” (being acquired in carrying on its enterprise) – although the concept of “enterprise” in Australia does appear to be broader than the concept of “economic activity” in the UK. In MT 2006/1 the Commissioner considers that a holding company that merely holds membership interests in other entities and derives income from those other entities because of its membership interests is not carrying on an enterprise (see paragraph 192).

The question then is whether the grouping provisions in Division 48 could be used to give BAA an entitlement to the input tax credits. In this context it is relevant to consider s 48-45 which provides as follows:

(1) If an entity makes a *creditable acquisition or *creditable importation the input tax credit for which is attributable to a tax period during which the entity is a member of a *GST group:

(a) the representative member is entitled to the input tax credit on the acquisition or importation; and

(b) the entity making the acquisition or importation is not entitled to the input tax credit on the acquisition or importation (unless the entity is the representative member).

(2) In deciding, for the purpose of subsection (1), whether an acquisition or importation by an entity is a *creditable acquisition or *creditable importation, the acquisition or importation is treated as being solely or partly for a *creditable purpose if, and only if, it would be so treated if:

(a) the GST group were treated as a single entity; and

(b) the GST group were not treated as a number of entities corresponding to the members of the GST group.

These provisions raise similar issues to those considered by the UK Court of Appeal. While the services were acquired by ADIL before it became a member of the BAA VAT Group, could those acquisitions be “attributable” to a tax period in which ADIL was a member of the group? – thereby giving BAA an entitlement to input tax credits.

In my view, the answer to the question should be the same.  Given the facts found by the Tribunal, at the time of acquiring the services, those acquisitions were attributable to a tax period during which ADIL was not a member of the BAA VAT Group – therefore s 48-45(1) is not engaged. Of course, that is not to say that a different fact pattern may support an argument that the acquisitions made by an entity in one tax period are properly “attributable” to a later tax period in which that entity was a member of a GST group.

I should also note that the construction of the word “attributable” is the subject of the application for Special Leave by the Commissioner in Commissioner of Taxation v Unit Trend Services Pt Ltd [2012] FCAFC 112. That application is to be heard by an expanded bench of the High Court later this month.