Recovery of VAT on transaction costs

In many M&A deals it is common practice for the acquirer to incorporate a new company (‘Bidco’) to acquire shares in the target. As transactions progress, a Bidco will typically incur VAT in respect of deal costs so it is important that transactions are appropriately structured so that this VAT may be recovered where possible by the Bidco.

On 21 February 2013 the Court of Appeal handed down its judgment in BAA Limited v Revenue and Customs Commissioners. The decision serves as a warning that the recovery of VAT on such transaction costs should not be taken for granted, and sets out important factors in relation to VAT recovery that should be considered as part of any transaction.

The decision concerns approximately £6.7million of VAT incurred by Airport Development and Investment Limited (ADIL), the bidco incorporated in connection with the acquisition, by a consortium led by Ferrovial SA, of what was then BAA PLC. The acquisition completed on 26 June 2006, and on 22 September 2006 ADIL joined the BAA VAT group. Prior to doing so, ADIL paid professional fees to a number of advisers, and incurred the disputed VAT thereon. HMRC denied ADIL recovery of this VAT…

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