Costs in aborted or failed M&A transaction– have you considered reclaiming the VAT incurred?
If a considerable amount of VAT has been paid on professional fees relating to failed M&A activity and has not been reclaimed is there now a potential opportunity for substantial VAT refunds as a result of the Ryanair case?
On 3 May 2018 Advocate General (AG) Kokott of the Court of Justice of the EU (CJEU) issued her opinion in a referral by the Irish Supreme Court that ultimately may result in Ryanair receiving a VAT refund of EUR 770,000.
Although the CJEU’s decision is about six months away and the final decision by the Irish Supreme Court could take another 18 months, on foot of this opinion immediate action should be taken by businesses who have incurred considerable costs, and wish to recover the corresponding VAT incurred, on aborted or failed M&A transactions.
The case at hand concerns the recovery of VAT incurred by Ryanair in relation to its failed bid to acquire control of Aer Lingus in 2006. Substantial professional fees were incurred and Ryanair sought to reclaim the VAT incurred. The European Commission, however, ended up blocking the proposed takeover on competition grounds which, in turn, led Irish Revenue to deny Ryanair’s input VAT claim on the basis that, as the takeover was aborted, there was no direct link between the costs incurred and any VAT-taxable supplies made by Ryanair with the costs essentially being seen to relate to the potential acquisition of shares in Aer Lingus. Despite the fact that Ryanair had proven that it had intended to make taxable supplies to Aer Lingus, in the event that it was successful in its takeover bid, the Irish High Court held that the activity carried out by Ryanair related to its takeover did not amount to economic activity giving rise to VAT input deduction. The Irish Supreme Court had doubts about the High Court decision and referred the issue to the CJEU.
AG Kokott, in her opinion, considers that Ryanair is entitled to reclaim the input VAT credit as there was a clear intention to provide management services to Aer Lingus and the costs of acquiring the shares in Aer Lingus were also designed as to bring about a direct, permanent and necessary extension of Ryanair’s own taxable activity (i.e. the provision of air passenger transport services). She emphasised that this is the case even if, as in the Ryanair case, the takeover is ultimately aborted and the envisaged management services could not be supplied.
A CJEU decision in favour of Ryanair will bring much needed certainty to the VAT recovery position for all businesses that have incurred costs on the acquisition of other companies that ultimately did not proceed. Such clarity would be very welcome in an area that has been long shrouded with confusion, inconsistencies and judgements that have often shied away from economic and commercial reality. It is fair to say that the CJEU has itself evolved its thinking on VAT recovery on costs related to shares over a couple of decades and that its current jurisprudence actually contradicts some of its earlier case law. It does not help clarity that the CJEU has not acknowledged that fact and indeed continues to cite judgments which it has long since abandoned as good law. Nevertheless it is now generally accepted that if there is an intention to make taxable supplies to a company to which you intend to supply taxable services once you acquire those shares you should be entitled to claim input tax deduction even if you are not successful in acquiring the shares and you do not therefore supply taxable services.
Only time will tell if the CJEU will follow AG Kokott’s opinion. In the meantime, potentially affected businesses, that have incurred VAT on costs, may wish to consider claiming a VAT refund. In Ireland, this is particularly important where the costs were incurred within the last four years because of the four-year statute of limitations for claiming a VAT refund. However, the opportunity to reclaim VAT should be considered in all EU jurisdictions where aborted acquisition costs have been incurred and depending on the jurisdiction in question differing courses of action may be required.
Furthermore, in terms of future M&A activity, once VATable activities (of any degree) are intended after acquisition it would be advisable to clearly document these intentions at the earliest opportunity with a view to copper fastening the right to input VAT recovery on costs, even if the acquisition is unsuccessful.
The ultimate CJEU decision in the Ryanair case could have a significant financial impact on any businesses involved in takeover activity. Watch this space…
In the meantime should you wish to discuss this matter further or require our assistance on this or any Indirect Tax related matter please contact any member of the Indirect Tax team.