Provision of management services must be a ‘business’ to justify input VAT recovery on associated costs

Wed 06 Feb 2019

The First tier Tribunal has held that in order to demonstrate that the supply of management services is an economic activity justifying input VAT recovery on associated costs, there should be an absence of contingency around the arrangements.  Evidence to support this such as appropriate documentation would be helpful.

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W Resources plc provided services to its tungsten exploration and exploitation subsidiaries during the preparatory stage of their activities.  Consideration for these services during this phase was, however, only chargeable and payable when the relevant subsidiary had revenue “and was consequently able to pay for such services”.  The documentary evidence for this was incomplete and it was not clear whether the subsidiaries had ever agreed to these terms.  In providing those supplies, W resources incurred input VAT which it sought to recover, and would have been able to do so if it had been carrying on an economic activity.

Input VAT is only recoverable if it is incurred in generating taxable ‘economic supplies’.  The main point in this case was whether during the preparatory phase, the uncertainty that services would ever be paid for meant the provision of those services at that time was not an ‘economic activity’.

Following earlier FTT decisions in the cases of African Consolidated Resources (ACR, 2014 FTT 580 (TC)) and Norseman Gold (Norseman, 2016 UT 69 TCC), and the CJEU case of Bastova (case C-432/15), the First tier Tribunal held that the uncertainty over whether the services would ever be paid for, broke the link between the costs being incurred and the generation of sales as part of an economic activity.

In ACR management services were charged at a fixed nominal fee of £10k with the expectation that the full charge would be made when the subsidiaries made substantial profits.  In Norseman no invoices were raised for management charges until the subsidiaries could afford to pay for them.  In Bastova the supply of a horse to a race organiser in return for prize money did not mean there was a supply for consideration due to the uncertainty a prize would be won.

While the FTT in W Resources would have been willing to agree there was sufficient evidence of an economic activity if a contingency over payment was satisfied, it noted that in Norseman the UT had said that, “even if the intention was full cost recovery, there would still remain uncertainty about whether payment would be made at all, let alone about exactly when”.