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W Resources plc v HMRC

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In W Resources plc v HMRC [2018] UKFTT 746 (18 December 2018), the FTT found that a parent company which had provided management services to two newly acquired subsidiaries, under the condition that they would not be invoiced until they generated income, had not carried on an economic activity up to that point.

W Resources was originally founded as an oil and gas production company, but following the revocation of the licence of one of its subsidiaries by the Kazakhstan government, it refocused on the exploration and exploitation of tungsten. It acquired two subsidiaries, as a result of its decision to refocus, and incurred input tax in the provision of management services to them.

The issue was whether W Resources had made supplies for consideration to its subsidiaries, in the course of carrying on an economic activity, so that the relevant input tax was deductible. The FTT referred to Wakefield [2018] EWCA Civ 952 as authority for the proposition that the CJEU case law requires a two-stage test.

The first test is satisfied if the relevant person is making supplies for consideration. This test requires a legal relationship between supplier and recipient, pursuant to which there is reciprocal performance, known as the ‘direct link’. In the FTT’s view, this test is usually satisfied regardless of any risk of default or of a subsequent failure to discharge an obligation.

The second test is whether the relevant person is making the supplies for the purposes of obtaining an income. The FTT thought, however, that in the case of a holding company making supplies of management services to its subsidiaries for a consideration, there can be no circumstances where that holding company is not also carrying on an economic activity. The FTT concluded: ‘It is, effectively, one situation where the divergence between the two tests, which occurred in Borsele (Case C-520/14) and in Finland (Case C-246/08), cannot arise.’

The FTT found that the first test was satisfied in this case even though W Resources was only entitled to invoice the subsidiaries once they started generating revenues. However, this contingency impacted on the second test. The FTT felt bound by the view of the UT, expressed in an obiter comment in Norseman [2016] UKUT 69, that in circumstances where there was uncertainty as to whether payments would be made at all to W Resources, it did not have the intention to make future supplies for consideration and was therefore not carrying on an economic activity.

Read the decision.

Why it matters: The FTT observed: ‘Left to my own devices, I would have been inclined to conclude that, because the necessary degree of reciprocity between the relevant supplies and the payments will exist as long as the contingency is satisfied and the parties intended at the outset that the contingency would be satisfied, this should be treated in the same way as any other situation where a person intends to make future supplies which will definitely be for a consideration.’ The FTT therefore expressed the view that the appellant was carrying out an economic activity before finding that this was not the case, applying the UT’s decision in Norseman.

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