VAT claims cleared for takeoff after £1m MyTravel win

A wave of corporate restructurings could force the taxman to hand over precious VAT revenues, if a £1m tax case victory by MyTravel leads to more companies following in the holiday operator’s footsteps.

According to advisers, HMRC is already dealing with a number of cases relating to the recovery of VAT incurred on advisory work during the M&A boom, and similar VAT recovery requests could follow relating to the restructuring fees companies racked up in the rush to avoid the ravages of the credit crunch.

The MyTravel case centred on advice provided to the stricken holiday operator in 2002. The argument focused on whether an emergency review undertaken by PwC on behalf of the holiday company and its prospective lenders – but arranged and paid for by MyTravel, now called Airtours Holiday Transport Ltd – was eligible for a VAT rebate. The tax tribunal ruled in the company’s favour.

The tax community is also braced for a long-awaited ruling on BAA’s move to recover VAT on M&A fees.

“The taxpayers’ entitlement to recover VAT charged on adviser fees is typically the key VAT issue in M&A and private equity transactions. This VAT issue also arises in restructuring work. Given the prominence of these activities in recent years, a significant sum of VAT is at stake” said Ed Murphy, a senior manager in KPMG’s indirect tax group.

Steve Hodgetts, VAT partner at Baker Tilly, said: “The ruling does open up further opportunities for VAT recovery. The bottom line is there are dual beneficiaries and this is relevant in restructurings.”

MyTravel is one of a number of cases relating to input tax recovery in the context of restructuring and deal fees, KPMG said in a recent briefing, and the BAA ruling is the one which is most keenly awaited.

However, “the strong taxpayer win in My Travel will have a broad impact” Murphy added.“HMRC has recently launched a wide-ranging attack on the e ntitlement to recover VAT charged by advisers in deals and the VAT Tribunal is now starting to release its decisions in test cases.”

If the taxman loses further test cases it will heap more misery on the department at a time when it is desperate to keep tax revenue flowing into its coffers.

The key points that companies will use to convince tax judges they are in line for a similar rebate to MyTravel are that the tax tribunal agreed the company had requested the refinancing review, had involvement in deciding who was appointed, authorised the adviser to do the work and promised to pay for it.

Judges also found in favour of the company that the work needed to be done if the business was to continue, so the work was used for the purpose of the business and therefore eligible for the recovery of VAT.

“We expect that there’s going to be a number of test cases and we don’t think this is the tribunal’s final word in this area,” Murphy said.

HMRC refused to comment on the number of similar cases going through the tax tribunal system, nor the amount of VAT contested.

However, an HMRC spokesman added that MyTravel’s win might be challenged in the future. “We are currently considering whether to appeal the decision,” he added.