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First-tier Tribunal
African Consolidated Resources plc (TC03705) Norseman Gold plc (TC03698)
The First-tier Tribunal has issued two comparable, but separate, decisions relating to the provision of management services to overseas subsidiaries by two UK VAT registered holding companies within the mining industry. The issue in both cases was whether the provision of loan finance and management services by the holding company to its overseas subsidiaries amounted to an economic activity and the making of taxable supplies, such that the holding company was eligible for UK VAT registration and subsequent input tax recovery.
In the case of Norseman Gold plc the input tax incurred related to the services of a UK-resident director, accountancy and audit fees, fees incurred in raising finance, registrars' and Stock Exchange fees, and fees for public relations and website design. The Tribunal held that the services provided to its subsidiaries were, in principle, capable of amounting to a taxable supply. However, the failure to agree on or stipulate a price or consideration for these services led the Tribunal to conclude that there was no obligation to pay for the supplies at the time they were made. The supplies made did not, therefore, constitute an economic activity for VAT purposes. Consequently, neither VAT registration nor input tax recovery was possible.
Similarly, in the case of African Consolidated Resources plc, management services were provided by its sole UK-based director to one of its subsidiaries. The services were billed annually for a fixed fee of £10,000 however no cash payments were ever made, rather, the services were settled by increasing the level of the debt due from the subsidiary. The Tribunal, as in the Norseman Gold case, concluded that whilst the supplies were capable of amounting to an economic activity, as no consideration had been received for the services, there was an insufficient legal and economic link between the management services provided and the fixed fee charged based, as it was, simply on what the subsidiary could afford to pay. The Tribunal concluded that, in the circumstances, the services had not been effected for consideration and
so should not be treated as a taxable supply.
The difference with the African Consolidated Resources case was that loan funding was also provided to other subsidiaries in the group at a fixed 4% interest rate. The interest had accrued but again, had not been paid. No formal loan agreement was in place and no repayment schedule had been established. The Tribunal held that a third party lender would not have been prepared to lend on these terms and as such the loan funding was more closely aligned to an equity investor than a commercial lender and therefore not an economic activity for VAT purposes. Comment – First-tier Tribunal decisions are only binding on the parties involved and do not set any binding legal precedent. However, the cases highlight the need for businesses in the natural resources sector to ensure that their VAT position is given due consideration and, where necessary, agreed in advance with HMRC.
For further information in relation to any of the issues highlighted in this Case Alert please contact:
The Regions Stuart Brodie [email protected]
London/South East Karen Robb [email protected]
The Midlands Mike Sheppard [email protected]
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