VAT and unsuccessful bid costs

The Irish Supreme Court has decided to refer to the ECJ the question whether a company is entitled to input VAT recovery in relation to an unsuccessful bid to acquire a target company: Ryanair Ltd v Revenue Commissioners [2017] IESC 19. The court considered that European law was unclear on the inter-relationship between the principles to apply where a holding company acquires a subsidiary intending to make supplies of management services to it and those principles applying to abortive supplies.

Background

In 2006, Ryanair sought to take-over Aer Lingus and incurred VAT on professional fees in relation to its bid. Ultimately, that bid was unsuccessful, but it sought to recover the VAT incurred as input VAT. It argued that it had intended to be involved in the management of the Aer Lingus business (rather than simply take a passive investment in the subsidiary) and as such the VAT should be attributed to that intended taxable activity. The Irish Revenue rejected the claim, arguing that there was no taxable activity to which the input VAT could be attributed.

Decision of the court

The court noted that there were two lines of ECJ jurisprudence relevant to the appeal. The first involved Cibo Participations SA, in which the ECJ held that it is clear that VAT incurred on the purchase of shares can amount to deductible input VAT where attributable to an economic activity of providing management services. In essence, there is a distinction between the purchase of shares as a passive investment, on the one hand, and the purchase of shares by a holding company for the purposes of engaging in the economic activity of providing management services to its subsidiaries, on the other. It is clear that the latter constitutes economic activity and amounts to the provision of a VATable service. It is equally clear that the former does not.

The other line of cases is Rompleman, in which the ECJ held that certain initial investment activity which predates the carrying out of the economic activity itself but which is geared towards it may be regarded as forming part of the economic activity so that VAT incurred in connection with that initial investment activity may qualify for an appropriate deduction. This is true even where taxable supplies never actually take place (for example, Intercommunale voor Zeewaterontzilting v Belgian State).

The essential difference between Ryanair and the Irish Revenue was whether it was possible to put together those two lines of jurisprudence and arrive at a situation where it was permissible to treat as input VAT, VAT paid on professional services connected with a potential purchase of shares, where it is said that there was a future intention to provide management and other similar services to the target of the acquisition (should the acquisition be successfully completed).

Separately, there was also the question whether Ryanair could, objectively, show that it had the relevant intention. In particular,  it was common case that Ryanair had not, up to the relevant time, provided management services to a subsidiary. Such activity was not part of its then established business. On the contrary Ryanair was involved in the provision of air travel and allied services.

However, the court concluded that the proper resolution of the correct application of the Cibo Participations and Rompelman lines of cases to a holding company involved issues of European law which were not acte clair and should be referred to the ECJ.

Conclusion

The recovery of input VAT by a holding company was recently considered by the UK Court of Appeal in BAA and is the subject of recent guidance by HMRC. Nevertheless, there remain areas of uncertainty in relation to the ability of a holding company to recover input VAT in relation to an acquisition and the decision of the ECJ in this case will be keenly awaited. Whilst, there is much that a bid vehicle can do to enhance its chances of recovering the VAT it incurs as input VAT, this remains a difficult area of law and, in the UK, HMRC guidance leaves room for doubt (see “HMRC revised guidance on VAT and holding companies”).