1. 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
stuart.brodie@uk.gt.com
London/South East
Karen Robb
karen.robb@uk.gt.com
The Midlands
Mike Sheppard
mike.sheppard@uk.gt.com
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