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HMRC overruled by Tribunal in MBO VAT case

The First-tier Tax Tribunal has ruled against HMRC's current policy on the recovery of VAT incurred on professional fees during a management buyout. In Heating and Plumbing Supplies Ltd, the Tribunal confirmed that HMRC is not entitled to isolate the activities of the buyout company where that company is a member of a VAT group.

Vinny McCullagh – VAT Partner at Grant Thornton UK LLP – advisers to the appellant – considers the decision to be very important for those businesses involved in management buy outs. "HMRC's policy of looking at the activities of the buyout company in isolation is clearly incorrect" comments McCullagh. "Under HMRC's existing policy, it tried to argue that the buyout company did not itself have any taxable activities and that, as such, it was not entitled to reclaim the VAT incurred on the buyout fees. However, where a buyout company is VAT grouped with the target company, the decision of the Tribunal is that HMRC can only look at the activities of the VAT group as a whole and if those activities are fully taxable activities, then the VAT Directive ensures there can be no restriction on the recovery of VAT on the professional costs."

McCullagh adds "This is the first UK Tribunal decision to expressly rule on the VAT group point. It follows the Court of Justice judgment in the earlier VAT case involving Skandia America which stated a clear principle that a VAT Group is a single taxable person. This decision reinforces that principle into UK VAT law and must now mean that HMRC will need to rethink its policy."