In HMRC v Tower Resources PLC [2021] UKUT 0123, the Upper Tribunal (UT) rejected an appeal by HMRC that a holding company adding the fees for management services provided to subsidiaries to inter-company loans constituted taxable supplies for VAT.

  • The company was a holding company that acquired licences to explore and produce oil in Africa. The activities were undertaken by local overseas subsidiaries.
  • Tower Resources provided management and technical services to the subsidiaries and added the costs to Inter-company loans, repayable on demand.
    • Prior to 2015, there were no written agreements and the services were charged at cost.
    • From 2015, written agreements were put in place and a 5% mark-up was added to the costs.
    • The loans were treated as financial assets (as repayable on-demand) in the holding company's accounts, although in practice it was understood that payment would not be asked for until the subsidiaries had the funds or Tower Resources required the funds.
    • As Supplies to overseas subsidiaries, there was no output VAT charged on the services. Tower Resources claimed Input VAT in relation to the services.

On appeal to the FTT, upholding Tower Resources' Appeal, it considered three elements:

  • What were the terms of the pre-2015 agreements? HMRC considered the loans to be contingent.
    • The FTT looked at the accounting treatment in the absence of written agreements and concluded that the loans were repayable on demand. The fact that this was a written term in the 2015 agreements supported this conclusion.
  • Were the supplies made for a consideration (as per Article 2(1) EU VAT Directive) and therefore taxable supplies?
    • The FTT found that as the loans were repayable on demand, there was valid consideration. The fact that the loans were not repaid did not change this.
  • Were the supplies made by a taxable person (as per Art 9(1) EU VAT Directive), i.e. someone carrying out an economic activity?
    • The FTT held that on the facts, Tower Resources was making supplies for consideration and so it was involved in economic activity.

HMRC appealed to the UT on the basis that:

  • The FTT had erred by looking at the agreements alone and not considering the economic and commercial reality of the transactions.
    • The UT refused to go back over the facts. It held that the FTT had considered all the evidence and so its findings were not in dispute.
  • The FTT had erred in that the services were not a supply for consideration.
    • HMRC argued that the economic reality that the loans would not be repaid unless the subsidiaries had funds or Tower Resources required them, made it a contingent payment which broke the direct link required between supply and consideration.
    • The UT found that on evaluating the facts the FTT had found no contingency. The loans were payable on demand and so the direct link was not broken.
  • The FTT had erred in that there was no economic activity.
    • HMRC claimed that the FTT had not fully considered all of the facts and had simply presumed there was economic activity based on the fact that there was a supply for consideration.
    • The UT found that the FTT had examined the objective circumstances as required by case law. W Resources v HMRC [2018] TC06879 was cited as stating, "The involvement of a holding company in the management of its subsidiaries will be regarded as economic activity for the purposes of Article 9(1) [provided they] are supplied for consideration within the meaning of Article 2(1)." The FTT did not make an error. Management services constitute economic activity and the UT agreed with the FTT's decision based on the facts.

The UT, in dismissing all three of HMRC's grounds for appeal, agreed with the findings of the FTT that Tower Resources PLC was able to reclaim Input VAT in relation to Management services charged to subsidiaries. 

Useful guides on this topic

 Appeals: VAT
The process of making a VAT appeal largely follows that of direct taxes, however, there are some differences. How do I appeal an HMRC decision? How do I appeal a penalty? How can I request a Statutory Review?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Groups: At a glance
Why form a group? What are the advantanges of a group? How to form a group?

Management recharges (holding companies)
When are intercompany charges subject to VAT? What rate of VAT applies to an intercompany charge? Is an intercompany charge a supply for VAT? Is there VAT on an intercompany payment for group relief?

Case Study 7: How to make a group
How to insert a holding company.

Place of supply: Services
The place of supply (POS) of a service determines whether the supply is within the scope of UK VAT and whether VAT is payable on that supply.

Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

External links

UT: HMRC v Tower Resources PLC [2021] UKUT 0123

FTT: Tower Resources PLC v HMRC [2019] TC7256

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