BAA Ltd v HM Revenue and Customs

Input VAT is deductible only where, when liability is incurred, the recipient is carrying on an economic activity and the input has a direct and immediate link with that person's taxable supplies or taxable business as a whole. Acquiring shares, even as part of a wider takeover and management plan, is insufficient where there are no actual or intended taxable supplies at that date. Outputs made by a target company cannot ordinarily be attributed to the acquiring vehicle. Later VAT-group membership does not retrospectively create the necessary link. The limited exception recognised in Faxworld for a transfer of a going concern did not apply. The appeal was dismissed.

ADIL, a special purpose vehicle, incurred VAT on professional and advisory services obtained for its successful acquisition of BAA plc. It later joined the BAA VAT group, and BAA claimed the input tax as part of the group's general overheads. The First-tier Tribunal allowed the claim, holding that ADIL was carrying on an economic activity and that there was a direct and immediate link with the group's taxable outputs: [2010] UKFTT 43 (TC). The Upper Tribunal upheld the economic-activity finding but allowed HMRC's appeal on the absence of a direct and immediate link. The Court of Appeal considered both whether ADIL was carrying on an economic activity when the input tax was incurred and whether BAA's outputs could be attributed to ADIL.

Lord Justice Mummery gave the judgment, with Lord Justice Patten and Mr Justice Kenneth Parker agreeing.

1. Disposition. The appeal was dismissed. The Court also dismissed BAA's challenge to the finding that there was no evidence of an intention, before completion of the takeover, to join the BAA VAT group.
2. Economic activity. The relevant date was when ADIL incurred liability for the input VAT. Mere acquisition of shares, although economically consequential, was not itself an economic activity for VAT purposes. The principles stated in Polysar Investments Netherlands BV v Inspecteur der Invoerrechten em Accijnzen, Arnhem [1993] STC 222 and Cibo Participations SA v Directeur regional des impot du Nord-Pas-de Calais [2002] STC 460 required actual or intended taxable supplies. The evidence established neither at the relevant date. Later management activity and later group membership could not cure that defect.
3. Direct and immediate link. The takeover services were connected with acquiring BAA, not with any taxable supply which ADIL made or intended to make. BAA's taxable outputs and any continuing benefit from the services were too remote. General-overhead treatment could not assist because the costs were not components of ADIL's own taxable business.
4. Attribution and VAT grouping. The ordinary rule, reflected in Abbey National plc v Customs and Excise Commissioners [2001] STC 297, was that one taxable person's inputs could not be treated as the cost components of another person's outputs. The limited transfer-of-going-concern principle in Finanzamt v Faxworld [2005] STC 1192 did not apply: BAA was not ADIL's successor, and the inputs were not acquired for BAA's taxable supplies. The VAT grouping provisions did not retrospectively create the required attribution.

1. Court of Appeal (Civil Division): dismissed BAA's appeal, upholding the result reached by the Upper Tribunal but adding that ADIL was not carrying on an economic activity at the relevant date.
2. Upper Tribunal (Tax and Chancery Chamber): on 22 June 2011, upheld the finding that ADIL was carrying on an economic activity but allowed HMRC's appeal because there was no direct and immediate link between ADIL's inputs and the relevant taxable outputs. It dismissed the cross-appeal concerning intention to join the VAT group.
3. First-tier Tribunal (Tax Chamber): on 28 January 2010, allowed BAA's appeal against the VAT assessment, holding that ADIL was carrying on an economic activity and that the necessary link existed: [2010] UKFTT 43 (TC).