AG Kokott has delivered her opinion in Sonaecom C-42/19, the latest of a long line of CJEU cases on VAT recovery by holding companies. This opinion, if followed, will limit VAT recovery on costs incurred in connection with abortive transactions.
Sonaecom was a holding company that supplied strategic management services to its subsidiaries. Sonaecom incurred consultancy fees and capital raising costs – commission paid to an investment bank to arrange the placement of a private issue of bonds - in connection with the proposed acquisition of a telecommunications and media company (Cabovisão). The acquisition didn't proceed. Instead, Sonaecom used the capital raised by the bond issue to make a loan to its parent company (Sonae).
Whilst a passive holding company does not have any right to recover VAT recovery on acquisition costs, a holding company that makes taxable supplies to its acquired subsidiaries is carrying on an economic activity and has the right to deduct VAT incurred on acquisition costs. There is no requirement that the VAT on the costs incurred by the taxpayer is proportionate to the VAT arising on the taxpayer's planned taxable activities. In Ryanair, the CJEU (and AG Kokott) considered the right of holding companies to recover VAT incurred on aborted transactions, ruling that a holding company is entitled deduct VAT on acquisition costs if it had the intention to make taxable supplies at the time that it incurred the costs, regardless of whether the acquisition was completed. However, although the intended provision of management services to Cabovisão would have been a taxable supply, the actual loan to Sonae was a VAT exempt supply.
Sonaecom had the intention to supply taxable management services at the time that it incurred the acquisition costs – therefore did Sonaecom have a VAT recovery right? AG Kokott drew a distinction between the consultancy fees, on which there was a right to VAT recovery in line with Ryanair, and the capital raising costs. The actual use of capital (the loan to Sonae) took precedence over the planned taxable use of the capital, meaning that there was a direct link between the capital raising costs and a VAT exempt transaction and consequently, no right to deduct VAT incurred on these costs.
AG Kokott rejected the taxpayer's argument that the capital was merely "parked" in loan form until it could be used to fund a future acquisition. Capital raising costs are not analogous to items taxed under capital goods scheme - where actual use is assessed and VAT recovery is adjusted over a number of years - but are instead a service that is consumed at the outset. This meant that there was no scope to refer to future acquisitions once the capital had been used to make the VAT exempt loan to Sonaecom.
- This opinion is in many ways unsurprising as to allow VAT recovery based on a taxpayer's former intention to make taxable supplies when the capital is subsequently used for VAT exempt purposes could give rise to tax avoidance.
- The rejection of the need for input VAT expenditure to be proportionate to expected output VAT on onward supplies will be welcome to taxpayers. It will be interesting to see whether the UK chooses to depart from this principle following the end of the transitional period.
- It reinforces the need for taxpayers to record evidence of their intention to make taxable supplies at an early stage – Sonaecom was still able to recover VAT on the consultancy fees, which would not have been possible in the absence of such evidence.
- Assuming this opinion is followed, taxpayers will need to keep a close eye on how any capital raised is actually utilised in the event that the transaction doesn't proceed. Where possible, in order to maximise the taxpayer's VAT recovery position, the capital should not be used for VAT exempt purposes.