A holding company that only owns shares and collects dividends is not in business for VAT, so it cannot register or recover VAT on its costs. Once it supplies genuine management services to its subsidiaries for a real fee, it is carrying on an economic activity, can register, and following the Larentia + Minerva judgment can generally treat VAT on the costs of acquiring those subsidiaries as a recoverable overhead, subject to partial exemption.

Why is a pure holding company outside VAT?

HMRC’s VAT Input Tax manual at VIT40100 says the basic functions of a holding company are to acquire and hold shares, receive dividends, defend itself and its subsidiaries from takeovers, and dispose of shares. HMRC treats all of these as investment activities, which are non economic activities for VAT. A company doing only this is in the same position as a private investor, as in the Polysar case, and VAT incurred on its costs is not input tax.

To be registered, a holding company must make or intend to make taxable supplies. Paragraph 9 of Schedule 1 to the Value Added Tax Act 1994 lets a person who is not liable to register ask to be registered if it makes taxable supplies or is carrying on a business and intends to make them. Most holding companies have no third party sales, so they rely on this entitlement (see voluntary VAT registration). Holding shares alone does not create a business, as explained in what counts as business activity for VAT.

What turns a holding company into a business?

VIT40600 says a holding company is carrying on an economic activity where it makes or intends to make supplies of management services to its subsidiaries for consideration. HMRC stresses two conditions: the services must be genuine, and the consideration must be more than nominal. Other recognised routes are trading in securities for short term gain, or acquiring shares as a direct, continuous and necessary extension of an existing taxable business.

The fee must be a real, enforceable charge. HMRC’s view, supported by the Upper Tribunal in Norseman Gold and the CJEU in MVM, is that management services provided for a fee that is payable only if the subsidiary is profitable are not supplied for consideration, so there is no economic activity. A vague intention to charge something at some point in the future is not enough; there should be an agreement covering the services, the price and when invoices will be raised. The VAT position on the charges themselves, and how grouping changes it, is covered in management charges between companies.

Can the holding company recover VAT on deal costs?

In July 2015 the CJEU decided Larentia + Minerva (C108/14 and C109/14). It held that VAT incurred on the costs of acquiring shareholdings in subsidiaries to which the holding company also intends to provide management services belongs to the holding company’s general expenditure and is deductible, subject to any partial exemption restriction. HMRC changed its policy as a result. Before that, it had required the VAT to be apportioned between the shareholding and the management services, and expected the costs to be recouped from management fees within a reasonable time.

VIT40600 now sets three conditions for recovering VAT on acquisition costs:

  1. the holding company claiming the VAT must be the recipient of the supply;
  2. it must be carrying on an economic activity for VAT; and
  3. that activity must involve making taxable supplies.

If the holding company will provide taxable management services to every subsidiary, VAT on the acquisition costs relating to those holdings is deductible, and receiving dividends does not affect this. If it will supply services to some subsidiaries but not others, the acquisitions of the others are investment activity and the VAT must be apportioned. If it also lends to the subsidiary and earns exempt interest, the VAT is apportioned under its partial exemption method (see VAT partial exemption).

Who has to be the recipient of the adviser’s supply?

Deals often involve a new bid company created late in the process, while advisers were engaged earlier by the buyer’s parent, its owners or the target. HMRC regards the holding company as the recipient where it has contracted for the supply (including by novation), used it, been invoiced and paid. If engagement letters are in another entity’s name and never novated, the bid company will struggle to recover the VAT however strong its management services case is.

VIT40600 also notes that VAT on the target’s own costs, such as vendor due diligence, may be deductible by the target if it is the recipient and the supplies were for the purposes of its business.

What if the acquisition extends an existing trade?

A trading company buying a competitor, a complementary business or a key supplier or customer to grow its market share or integrate its supply chain is not making an investment. HMRC accepts that in that case the shares are a direct, continuous and necessary extension of the existing business, and VAT on the costs can be linked to that business’s taxable supplies without any management charge. Another of HMRC’s examples is a retailer buying a company whose main asset is a property it intends to trade from. This contrasts with buying a free standing business purely for dividends or an eventual sale, where the VAT is not recoverable.

Does putting the holding company in a VAT group help?

Not by itself. VIT40600 says joining a VAT group cannot turn a non economic activity into an economic one, and does not automatically link the holding company’s costs to the group’s taxable outputs. A passive holding company’s acquisition VAT stays irrecoverable even if it groups with the companies it buys. Where the holding company does provide management services or interest bearing loans to the acquired companies within the group, HMRC looks through the disregarded intra group supplies: the VAT is recoverable to the extent the costs support taxable supplies made by the group. VAT Notice 700/2 likewise says input tax in a group is determined by how the group as a whole uses the goods and services (see VAT group registration).

HMRC also distinguishes stewardship costs, such as group audit fees, regulatory compliance, brand defence, bid defence and group legal costs. Where these are invoiced to the holding company for convenience but serve the whole group, the VAT is treated as a cost of the group rather than of the holding company.

How does it work in practice?

Illustration only. Topco is formed to buy two companies, A and B, both fully taxable. Before completion Topco signs a management services agreement with each, charging a fixed monthly fee for finance, HR and IT support. Topco engages the lawyers and accountants directly, receives their invoices and pays them. VAT on the fees is £60,000. Topco registers voluntarily on the basis of its intended management supplies. Because it will supply taxable services to both subsidiaries and makes no exempt supplies, the £60,000 is recoverable as an overhead.

If Topco instead intended to supply services only to A, and the costs relating to B were half the total, the VAT on the B costs would relate to investment activity and only about £30,000 would be recoverable. If Topco also made an interest bearing loan to A, part of the remaining VAT would be restricted under partial exemption.

What mistakes come up most often?

  • No written management services agreement, or fees contingent on profit, so there is no economic activity.
  • Adviser invoices addressed to a shareholder, a fund or the target rather than the company claiming the VAT.
  • No evidence of the intended business model at the time the costs were incurred. HMRC expects the holding company to keep evidence of its intention to make taxable supplies.
  • Assuming VAT grouping cures a passive holding company.
  • Ignoring exempt loan interest, which brings partial exemption into play.
  • Treating holding company costs as automatically recoverable. HMRC regards holding and disposing of shares as investment activity in itself, so costs need a link to the taxable activity.

The direct tax side of a holding structure is covered in holding company tax.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.