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.