Holding companies ― is there a direct and immediate link?

Produced by Tolley

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Holding companies ― is there a direct and immediate link?
  • What is a direct and immediate link?
  • How does the direct and immediate link apply in practice?
  • Acquisition costs ― management services provided to all subsidiaries
  • Acquisition costs ― management services provided to some subsidiaries
  • Acquisition costs ― management services and loans to subsidiaries
  • Acquisition costs ― costs incurred before taxable supplies are made
  • Acquisition costs ― taxable supplies never take place
  • Acquisition costs ― direct, continuous and necessary extension of a business
  • Sale costs
  • More...

Holding companies ― is there a direct and immediate link?

This guidance note examines how to identify if there is a ‘direct and immediate’ link between VAT on costs incurred by a holding company and its taxable business activities.

It is common for VAT to be incurred on a variety of costs associated with acquiring, holding or disposing of companies. However, VAT can only be recovered by a holding company where it has a direct and immediate link to the holding company’s taxable business activities.

For an overview of VAT and holding companies generally, see the Holding companies ― overview guidance note.

What is a direct and immediate link?

A holding company will only be entitled to recover VAT on costs where it can establish that there is a ‘direct and immediate link’ between the VAT it incurs on its costs and its taxable business activities.

Establishing whether such a direct link exists has been the subject of a lot of litigation at both UK and EU level, and a high degree of caution needs to be exercised. The key consideration appears to be whether the VAT is incurred on supplies which are ‘cost components’ of the holding company’s taxable business activities. HMRC accepts that as well as direct costs, general business costs (overheads) can have a direct and immediate link with a business’ supplies because they are cost components of the business as a whole.

This is a complex and much litigated area of VAT law. For discussion of the case law history on the direct and immediate link in the context of holding companies, see De Voil Indirect Tax Service V3.410.

How does the direct and immediate link apply in practice?

The paragraphs that follow look at whether there will be a direct and immediate link with taxable business activities in a variety of typical scenarios for holding companies.

Acquisition costs ― management services provided to all subsidiaries

Management services provided by a holding company to its subsidiaries can be a taxable

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