In two recent cases, Ryanair (C-249/17) and C&D Foods (C-502/17), the Court of Justice of the European Union (“CJEU”) had to rule on the recoverability of input tax. Both businesses sought to reclaim input tax incurred on costs in relation to a share transaction which subsequently did not happen.
It is worth remembering that, in simplified terms, there are two important criteria that must be met to allow input tax recovery.
- The business claiming the input tax deduction must carry on an economic activity; and
- The cost on which input tax is claimed must have a direct and immediate link
- - to a specific taxable supply (directly attributable input tax), or
- - to the business’s economic activities in general (residual input tax).
Ryanair had launched a takeover bid for all the shares of another airline with the intention to supply management services to that company after the acquisition. Although that bid had to be aborted for regulatory reasons and Ryanair was only able to acquire a part of the shares, the court ruled that Ryanair had the right to fully deduct as input tax the VAT it had paid on the consultancy services relating to the takeover bid. This was because these consultancy costs related to its intended economic activity, the provision of management services. This confirms previous case law.
Interestingly, the Advocate General had argued the case for the economic activity differently. In her view, a strategic takeover of another airline with the intention of thereby bringing about a direct, permanent and necessary extension of Ryanair’s taxable activity was already sufficient to constitute an economic activity. This is an argument that will hopefully be further developed through the courts. For the time being care should be taken to provide evidence of the intention to provide taxable services once the transaction has taken place.
C&D Foods was about an aborted sale of shares in a subsidiary to which the company, which was the holding company of the group, had provided taxable IT and management services. As the company had been unable to repay a loan, a bank had assumed ownership of the group and sought to recover the loan via the proceeds of the share sale. In this context, a range of consultancy services were requested and C&D Foods was denied the input tax recovery on these services.
Whilst the Advocate General confirmed that the provision of the IT and management services constituted an economic activity, she concluded that there could be no input tax recovery if the direct and immediate link was with an exempt sale of shares.
Again, the court took a slightly different view. The court observed that the share disposal with the aim to repay a debt did not relate to C&D Foods’ economic activity in the first place and therefore, there was no direct and immediate link at all. As a consequence, the input tax was irrecoverable.
It is good news that the CJEU confirmed in both cases that the fact an intended transaction did not take place does not affect the right to input tax recovery provided the above mentioned criteria of ‘economic activity’ and ‘direct and immediate link’ are met. However, given the complexity in this area, specialist VAT advice should be sought from the outset.
Article by Antje Forbrich.