Evidence is key to VAT claims

It’s a familiar principle in life that you need to provide evidence if you want to prove a point. In a recent Tribunal case, the appellant business was seeking to reclaim VAT on its costs but ultimately lost due to a lack of evidence of business activities.

The business, Norseman Gold plc, was a UK company with a number of overseas subsidiary companies running mining operations. Norseman claimed back VAT on its own operating costs on the basis that it was providing loans and management services to its subsidiaries.

The Tribunal examined the evidence and decided that the loans were not made on commercial terms and there was no evidence of an intention to raise management charges. The conclusion therefore was that Norseman was not making or intending to make supplies for VAT purposes and was not therefore entitled to reclaim VAT on its costs.

The case was decided on its specific facts but the clear ‘take-away’ for businesses more generally is the importance of ensuring that any arrangements are supported by adequate evidence. Properly documented agreements which specify the scope of services and the arrangements for payments to be made should be put in place from the outset.

The decision also highlights that HMRC are prepared to look more at the detail behind the activities of a business to test the substance of transactions particularly where there is nothing set down in writing. Between unconnected parties, contracts will normally exist as a matter of course whereas arrangements within groups are often looser and undocumented.

Even if the above case is appealed, I would fully expect HMRC to be looking more closely at VAT claims made by holding/parent companies whose only activity may be management of subsidiary undertakings. Businesses in this position should therefore be reviewing their arrangements and seeking further advice in cases of doubt.

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