Input VAT recovery on property SPV set up and operating costs

Mon 03 Feb 2020

In the case of Melford Capital General Partner Ltd (MCGPL), the First tier Tribunal has held that input VAT on the costs of setting up and operating a property special purpose vehicle (SPV) was recoverable. This was despite the fact that business of MCGPL was to manage investments for a fund, receive distributions from the investments and distribute them to partners in the Fund.

HMRC attempted to draw a distinction with the case of Larentia and Minerva (CJEU case C-108/14 and C-109/14). In that case, administrative and business services were provided to ‘subsidiaries’, whereas in Melford’s case significant investment activities (which were non-economic from a VAT perspective in HMRC’s view) were provided, which could not be ignored in determining the proportion of input VAT recovery.

The FTT however considered that:

the LLP’s services to the SPVs were taxable services of the MCGPL/LLP VAT group which were provided to its ‘subsidiaries’;
this was an economic activity and;
the operational and set up costs were incurred in the course of furtherance of that economic activity.

As a result the input VAT on the operational and set up costs were therefore recoverable.

The organisation of this investment structure is typical in the private equity and investment fund business, and the recovery of input VAT in such cases could have a material effect on returns available to investors.

For further discussion or advice on input VAT recovery in investment structures, please get in touch with a member of the Mazars indirect tax team.

Technical consultation document: Fifth Money Laundering Directive and Trust Registration Service

Background information

MCGPL is the general partner of Melford Special Situations LP (‘the Fund’) and is owned by Melford Capital Partners LLP (‘LLP’) with which it forms a VAT group. The fund owns an Isle of Man holding company which owns a number of property SPVs, which have their own separate VAT group (holding company and SPVs). Profits from the SPVs (for example rental profits or profits from disposing of an asset) are passed up through the holding company to MCGPL which then distributes them to partners in the Fund.

The LLP is contracted to provide advisory, property management and administrative services to the fund’s SPV’s, which it does directly to each SPV in return for a fee. It also provides investment and administrative advisory services to MCGPL under an agreement, but these are provided within a VAT group. MCGPL as general partner of the Fund carries on the business of the Fund which includes: raising equity and debt and making investment and divestment decisions; incurring costs of setting up and attracting investment into the Fund (such as legal costs; incurring general operating costs such as audit, accounting, bookkeeping, fund operator and due diligence costs).

Chris Lallemand Senior Tax Manager

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