[2010] UKFTT 43 (TC)

TC00357

Appeal number  LON/2007/1018

VAT – input tax recovery – costs incurred in takeover by bidder – subsequent grouping of bidder and target – appeal allowed

FIRST-TIER TRIBUNAL
TAX 

	BAA LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 
Respondents

				TRIBUNAL: 	Tribunal Judge Peter Kempster
						Mrs Joanna Neill

Sitting in public in London on 8 to 12 June 2009

David Southern of counsel instructed by Herbert Smith LLP for the Appellant

Rupert Anderson QC instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This appeal concerns the recovery of VAT incurred by a bidder on fees paid in connection with a successful takeover bid.  After the takeover the bidder joined the same VAT group as the target company.  The representative member of that VAT group claimed recovery of that VAT as input tax incurred as part of the group’s general overheads.  HMRC contend that no recovery is available for that VAT.
Introduction
2.	In Spring 2006 an investment consortium led by the Spanish infrastructure group Ferrovial launched a takeover bid for the UK airport operator BAA plc (“BAA”), then listed on the London Stock Exchange.  The bid vehicle was a new company called Airport Development and Investments Limited (“ADIL”).  Although initially contested, a revised bid was subsequently recommended by the Board of BAA plc and in July 2006 the target became a wholly owned subsidiary of ADIL.  
3.	In Spring and Summer 2006 ADIL incurred significant fees of investment banks, lawyers and others in connection with the takeover and those fees carried VAT.  In September 2006 ADIL joined the BAA VAT group.  The representative member of the VAT group then reclaimed that VAT as input tax of the group, attributable to the general overheads of the group.  
4.	HMRC disputed the input tax recovery and raised an assessment to VAT in the amount of approximately £6.7 million.  The representative member of the BAA VAT group appealed against that assessment.
5.	Since Spring 2006 several of the companies involved in the relevant transactions have changed or exchanged their names, sometimes more than once, and in order to avoid confusion the companies are in this decision notice named as they were in Summer 2006, when the takeover took place.  The various name changes are summarised in the Appendix to this decision notice. 
Mr Rupert Anderson QC
6.	The Tribunal records with great regret that Mr Anderson who appeared on behalf of HMRC in these proceedings died a few weeks after the conclusion of the hearing.  The Tribunal wishes to record its appreciation of the assistance he provided not only in the current case but also in his many other appearances before the former VAT & Duties Tribunal.  His presence and contribution will be much missed.
7.	In this decision notice we have recorded Mr Anderson’s submissions in greater detail than normal, in order that they should be clearly available to any appellate authority which might be required to consider this case.
Evidence before the Tribunal
8.	There were several bundles of documents that had been carefully prepared for the Tribunal.  Although the parties did not conclude a statement of agreed facts, much of the factual background was not disputed.  Matters that were not contentious are stated as facts in this decision notice.  The Tribunal also made a number of findings of fact, which are detailed in paragraphs 79 to 86 below.
9.	Oral evidence was given on behalf of the taxpayer by three witnesses.  
(1)	Mr Juan Bullón is now legal director of Ferrovial Aeropuertos SA, the company that manages all of Grupo Ferrovial’s airport assets including those in the UK.  In Spring and Summer 2006 he was one of the inhouse lawyers advising Ferrovial on the proposed takeover of BAA and he was closely involved in the transaction.  
(2)	Mr José Leo is now Chief Financial Officer of the BAA group.  He took up that position from elsewhere in the Ferrovial group in October 2006 and was not previously involved in the BAA group.  
(3)	Mrs Susan Warren was Indirect Tax Manager of the BAA group at the time of the takeover.  She moved to another organisation in December 2008.
10.	HMRC called no witnesses.
11.	The Tribunal found all the witnesses to be completely credible and reliable, with detailed recollection of the events within their personal knowledge.
Summary of events
12.	At March 2006 BAA was listed on the London Stock Exchange.  It was the holding company of a group that operated some of the largest commercial airports in the UK, including Heathrow, Gatwick and Stansted.  Those three named airports were the subject of strict regulation by CAA - the UK civil aviation authority.  The group also operated other airports (eg Southampton airport) that were not so regulated.
13.	Ferrovial is a large infrastructure group headquartered in Spain.  It was founded as a private company in 1952 and became a public company in 1999.  Originally a construction company operating only in Spain, its operations expanded worldwide especially into North, Latin and South America.  It developed a special expertise in infrastructure projects such as the building and operation of toll roads, car parks and commercial airports.  Prior to the BAA takeover Ferrovial had been involved with airports in Mexico, Chile, USA, Australia and the UK (Bristol and Belfast City airports).
14.	On 27 March 2006 ADIL was incorporated (under a different name).  Ultimate ownership (via two intermediate companies) was with Ferrovial and the two other members of the consortium established to make the takeover bid for BAA. The total equity subscribed was some £5.1 billion.  
15.	On 28 March 2006 ADIL entered into an engagement letter with the London branch of Macquarie Bank Limited (“Macquarie”), the terms of which are described later.  Around this time ADIL engaged a professional team including solicitors Freshfields Bruckhaus Deringer (“Freshfields”).
16.	On 7 April 2006 ADIL entered into agreements with a syndicate of banks for senior and subordinated debt facilities, totalling some £8.7 billion.  On the same date ADIL announced a firm intention to make an offer for BAA.
17.	On 20 April 2006 ADIL made the formal offer.  BAA’s defence document was issued on 3 May 2006.  On 12 June 2006 ADIL made a recommended final offer, with acceptances becoming unconditional on 26 June 2006.  On that last date ADIL became the owner of the BAA group.
18.	In July 2006 ADIL commenced presentations and negotiations to replace the interim finance facilities concluded in June with longer-term refinancing.
19.	In July to October 2006 ADIL paid fees to Macquarie, Freshfields and other persons in connection with the takeover and incurred VAT thereon.   
20.	On 21 September 2006 ADIL made an application to HMRC to join the BAA VAT group.  HMRC originally declined to accept the admission of ADIL to the VAT group but on 18 January 2007 HMRC agreed that ADIL should be admitted to the VAT group with effect from 22 September 2006.  
21.	HMRC challenged the deduction claimed in respect of the VAT incurred by ADIL.  On 21 February 2007 HMRC issued a VAT assessment in the amount of £6,676,733 pursuant to s 73(2) VAT Act 1994 (“VATA”).  
22.	Correspondence and meetings followed but the parties failed to resolve the issue.  BAA appealed formally in June 2007 which HMRC accepted as a competent appeal.  To facilitate the appeal (s 84 VATA) the disputed VAT was paid by BAA to HMRC on 31 July 2008.
23.	The above sequence of events is now covered in more detail.
The formation of ADIL
24.	On 27 March 2006 ADIL was incorporated (under a different name).  Ultimate ownership (via two intermediate companies) was with the members of the consortium established to make the takeover bid for BAA:
(1)	Two Ferrovial companies (Ferrovial Infrastructures SA and Lernamara SA) together owning 61.06%
(2)	CDP Airport Infrastructure Fund LP – a vehicle of the Canadian pension fund manager Caisse de dépôt et placement du Quèbec – owning 28.94%
(3)	GIC Baker Street Investment PTE Ltd – a vehicle of the Singapore sovereign wealth fund – owning 10%.
The total equity subscribed was some £5.1 billion.  
25.	The memorandum of association of ADIL was in standard form for a general commercial company.
26.	The accounts of ADIL for the period ended 25 June 2006 describe the company’s principal activities:
“The Company is involved in the financing activities of its ultimate parent entity in the UK (FGP Topco Limited) for the acquisition, and ongoing operations, of [BAA]”
27.	Mr Bullón’s evidence was that Ferrovial identified its consortium partners in the second half of 2005 and the choice of joint venture vehicle was made in early 2006; CDPQ already had considerable investment in infrastructure projects worldwide and GIC were entering that field.   All the co-investors were clear that the investment was to be long-term; there were no pre-organised exit strategies; the intention was to remain managing the assets; the assets were not being acquired merely for financial reasons.  BAA’s business was a regulated activity and permission had to be obtained from the Takeover Panel (in early 2006); it was necessary to have a single vehicle to pursue the takeover.  The role of ADIL from the outset had been to acquire, manage and operate the BAA airports.  
28.	Mr Anderson submitted that ADIL was only ever a takeover vehicle that operated on behalf of the consortium members.  It had no employees and no turnover (other than dividend income).  The actual running of the airports was and was always intended to be done by other companies, as was the supply of support and management services.  
Appointment of the advisory team
29.	On 28 March 2006 ADIL entered into an engagement letter with Macquarie.  
30.	The engagement letter contained the following passages:
“Macquarie’s Role – The Acquisition – Macquarie is engaged by [ADIL] in connection with the Acquisition to act as co-financial adviser to [ADIL] with [Citigroup]. … The services to be provided under this engagement in connection with the Acquisition may include, amongst other things, advice and services as set forth in Schedule 1.”
“Schedule 1 – Services which may be provided in connection with the transaction”.  This contained a two page list of tasks arranged under the following sub-headings: “Business plan and financial modelling; Due diligence; Valuation; Capital structure in connection with the acquisition facilities; Execution.”
“Macquarie’s Role – The Refinancing – Within 24 months of completion of the Acquisition, the Consortium and/or [ADIL] and/or [BAA] intend to implement a debt strategy that will involve the following (i) a refinancing of [BAA’s] existing financial facilities (including its public debt) and (ii) a full refinancing of the facilities used by the Consortium or [ADIL] to fund the transaction …  Macquarie is engaged by [ADIL] in connection with the acquisition to act as its financial adviser in connection with [both (i) and (ii)]. … The services to be provided under the engagement for the Refinancing may include, amongst other things, advice and services as set forth in Schedule 2.”
“Schedule 2 – Services which may be provided in connection with the refinancing”.  This contained a one page list of tasks arranged under the following sub-headings: “Objectives and strategy; Process; Model and sensitivity; Fund raising; Structuring, documentation and hedging.”
“Fees – Completion fee – [ADIL] shall pay Macquarie a fee (the Completion Fee) of £30 million for its services as co-financial adviser in connection with the Acquisition.  The Completion fee will become due and payable on completion of the acquisition …”  There were then provisions to cover the situation of a minority acquisition, and a break fee in the event of an abortive bid.
“Fees – Refinancing fee – If the Refinancing is implemented within 36 months following completion of the Acquisition [ADIL] shall pay Macquarie a fee of £20 million for its services hereunder.”  There were then provisions to permit extension of the 36 month period, but no break fee.  
There was a clause stating all amounts to be exclusive of VAT.
31.	Mr Bullón’s evidence was that the business plan (referred to in schedule 1) was shown to the banks in raising the finance facilities but was also used throughout the subsequent refinancing in the form drafted by Macquarie.  Also, that the tasks in relation to the rating agencies (also referred to in schedule 1) were relevant to the refinancing.  The acquisition was not a static event but a necessary step towards running BAA’s business.
32.	Mr Anderson submitted the appointment fell into two distinct elements.  There were services related to the takeover, as described in schedule 1, attracting the £30 million fee. Separately there were services related to the refinancing, as described in schedule 2, attracting the £20 million fee.  The former necessarily related to pre-acquisition activities.  Only the latter, which were post-acquisition, could relate to the business of the BAA group.
33.	ADIL engaged a professional team including Freshfields.  Also, contracts were entered into with companies specialising in shareholder communications and other functions essential to a takeover bid for a listed company.  Mr Bullón’s evidence was that it was made clear to all of ADIL’s advisory team that they were acting for ADIL and not defending the particular interests of the shareholders, each of whom appointed their own advisers.  
Raising the debt finance
34.	On 7 April 2006 ADIL entered into agreements with a syndicate of banks for senior and subordinated debt facilities, totalling some £8.7 billion (being the total amounts described in paragraphs 35 and 36 below).  On the same date ADIL announced a firm intention to make an offer for BAA.
35.	The senior facilities comprised two facilities: facility A was approximately £4.7 billion and facility B was £2.0 billion.  Clause 3 of the senior facilities agreement (which runs to some 240 pages) describes the “purpose” of the facilities – that is to say, how the funds must be applied.   At that time several methods of effecting the takeover were anticipated but singling out that which actually occurred (cash purchase of shares):
“Each Borrower shall apply all Facility A Loans in or towards … (i) financing the acquisition of [BAA] Shares to be acquired by [ADIL] pursuant to the Share Offer … and/or (vii) (in the case of a member of the [BAA] Group) refinancing its own Financial Indebtedness which is outstanding at the first Utilisation Date and in or towards the payment of any break funding costs, redemption premia and other costs payable in connection with such refinancing.”
“Each Borrower shall apply all amounts borrowed by it under Facility B: (i) towards funding Capital Expenditure incurred by members of the [BAA] Group and/or refinancing such amounts to the extent they were initially funded from other sources … and/or (ii) in the case of [ADIL] towards funding the cost of interest incurred by it [in certain circumstances] …”.
36.	The subordinated facility totalled £2.0 billion and clause 3 of the subordinated facility agreement (some 200 pages) requires the borrower to apply monies borrowed under the subordinated facility towards financing the acquisition of BAA shares and transaction costs.
37.	Mr Bullón’s evidence was that these facilities were always intended to be replaced – they were expensive and restricted, and once the takeover was achieved better and more sophisticated refinancing would be undertaken.  Work started on the refinancing just two days after the takeover was final.  It was necessary to make arrangements for the capital expenditure programme (the senior B facility) because that programme was already in place as a regulatory requirement, being a term of the approval of the tariffs at the regulated airports.  
38.	Mr Leo’s evidence was that in order to borrow funds under the capital expenditure facility (the senior B facility), a capital expenditure statement was required, certifying that sufficient capital expenditure had been incurred by the BAA airport operating companies to support the drawing of funds.  In the period to 31 December 2006 the operating companies borrowed £200 million under the senior B facility to fund capital expenditure incurred by them.  By July 2008 the entire £2 billion senior B facility had been fully utilised.  He also confirmed that the total facilities were always seen as short-term, to be replaced as soon as possible, although this actually took longer than expected and they were eventually replaced in Summer 2008 following negotiations by ADIL.  The delays were due to discussions with the airports regulator, an enquiry by the Competition Commission, and the tightening of commercial credit facilities generally – none of these were factors connected to the new ownership of the airport business.
39.	Mr Southern submitted that the finance was available to ADIL for at least four purposes:
(1)	To pay the vendors of the BAA shares (senior facility A and the subordinated facility, total £6.7 billion).
(2)	To refinance the existing borrowings of the BAA group (senior facility A – to the extent not used above).
(3)	To finance the £2 billion capital expenditure programme, all of which occurred post-acquisition (senior facility B)
(4)	To be available as a contribution to general working capital of the BAA group (senior facility A – to the extent not used above).
Accordingly, it could not be said that the work undertaken on the two debt facilities was exhausted upon the acquisition of the BAA shares; some of the purposes of the facilities pre-supposed the success of the acquisition and ADIL’s subsequent involvement in the business of the BAA group.  
40.	Mr Anderson submitted that it would have been impossible to plan the subsequent refinancing at this point in time because the only information available to the consortium was that contained in BAA’s public documents; the refinancing was post-acquisition and was distinct from the pre-acquisition finance arrangements.
The initial offer
41.	On 20 April 2006 ADIL made its formal offer.  The initial offer document (which consisted of over 300 pages) issued by ADIL contained the following passages:
[p 10]  “Reasons for the proposed acquisition of BAA – The proposed acquisition of BAA is entirely consistent with the strategy of Ferrovial … in recent years to increase their focus on long-term and international investment in infrastructure and transport services businesses, including airports and toll roads. “
[p 11]  “Our plans for the BAA business – Our aim is to maximise BAA’s operational and financial efficiency, whilst also focussing on security, safety, good airline and passenger service and environmental issues.  We are committed to the long-term ownership and continued development of BAA’s business, and to the investment needs of the business in the future.  Key to this is our intention to keep together BAA’s UK airports and to work co-operatively with the UK Government and the CAA in relation to the White Paper recommendations for runway and terminal development.”
[p 65]  The senior debt facilities were “available to [ADIL] and others for the purposes of, inter alia, funding a part of the consideration payable in respect of the Offers, and the transactions related thereto including fees costs and expenses and payments to holders of options in BAA shares.  The Senior Facilities Agreement is comprised of three facilities:
•	An acquisition term loan facility split into two tranches;
•	A revolving credit facility split into two tranches to be used for the financing of capital expenditure and (subject tot a cap) to meet the purchase price for BAA shares; and
•	A multicurrency revolving credit facility.”
The defence document
42.	BAA’s defence document was issued on 3 May 2006.  It recommended that shareholders reject the offer as, “The Ferrovial Consortium’s offer does not begin to reflect BAA’s true value.”
43.	Mr Anderson made the following points in connection with the defence document:
(1)	BAA had its own advisory team, including Rothschild and UBS;
(2)	the bid is described by the Chairman as a “hostile offer”.
Mr Anderson submitted that ADIL’s advisers’ fees could not be incurred for the purposes of BAA’s business if BAA was fighting the bid and was separately advised.
The recommended offer
44.	On 12 June 2006 ADIL made a recommended final offer, with acceptances becoming unconditional on 26 June 2006.  On that latter date ADIL became the owner of the BAA group.
45.	The recommended final offer document (which consisted of over 250 pages) contained the following passages:
[p 9]  From BAA’s Chairman: “[ADIL] has indicated that it is committed to the long term ownership and continued development of BAA’s business and to its investment needs in the future.” 
[p 29]  “Investment plans - [ADIL] has ensured that financing will be available to undertake the published capital expenditure programme of BAA in the UK.  The need for terminal and runway capacity has been highlighted in the White Paper and [ADIL] recognises the importance of implementing the CAA’s recommendations for the future development of the airports in South-East England in particular.  To assist in this process, [ADIL] has arranged a £2.0 billion capital expenditure facility which is capable of being drawn for a five-year period.  Should this funding source be fully utilised, [ADIL] is confident it will be able to raise additional capital expenditure facilities to assist in funding further investment.”
[p 29]  “Refinancing – Shortly after the completion of the acquisition of BAA, [ADIL] intends to refinance the Senior Acquisition Facilities with a longer term financing structure based upon proven techniques adopted by other regulated companies.  This process is intended to provide the medium and long-term financing required to support the investment needs of BAA.”
46.	Mr Anderson made the following points in connection with the recommended offer document:
(1)	[Cover] It sets out who each financial adviser is acting for – Macquarie is acting only for ADIL.
(2)	[p 28] The three directors of ADIL are described in such manner as to identify them as representing the members of the consortium.  It is made clear that ADIL was created for the purposes of the acquisition. 
(3)	[p 29]  ADIL does not bring a new capital expenditure plan; instead it arranges the finance necessary for the programme to which BAA is already committed.  ADIL intends to refinance the senior debt facility with a longer term facility.
(4)	[p 98] The main purpose of the senior debt facilities is to pay for the shares and transaction costs. 
(5)	[p 199] Among the identified financial risks are, “BAA has a significant amount of pre-existing indebtedness, some of which may require prepayment on a change of control.”  [p 200] “The BAA Group has capital investment requirements which imply a need for significant external financing in the medium term.” [p 201] “The terms of the BAA financing documents which are not publicly available may be more onerous or restrictive than currently anticipated.”  [p 202] “Lack of due diligence access to BAA even though transaction recommended.”  So all the work undertaken on modelling at the pre-acquisition stage would have to be revisited post-acquisition – the pre-acquisition work was not adequate for the refinancing.  
Fees are paid
47.	In July to October 2006 ADIL paid fees to Macquarie, Freshfields and other persons in connection with the takeover and incurred VAT thereon.  Listed below are the fees that gave rise to the VAT which is in dispute in this appeal, together with extracts from the narrative on the relevant invoice.
48.	Macquarie – “Project Berlin – Completion fee … for its services as co-financial adviser in connection with the acquisition of [BAA]” - £30 million plus disbursements plus VAT.
49.	Freshfields – “Project Berlin – Professional services incurred in advising in connection with the offer for [BAA] by [ADIL]” - €9.7 million plus disbursements plus VAT.
50.	Salisbury Associates (shareholder communications) – an appointment letter dated 19 May 2006 provides for a fee of £549,000 plus a success fee of £215,000 plus disbursements plus VAT – produced to the Tribunal was only the first instalment invoice. 
51.	Computershare Investor Services plc – “BAA plc takeover on behalf of [ADIL]” – aggregate £560,000 plus disbursements plus VAT.
52.	KPMG - “Project Berlin” - £225,000 plus disbursements plus VAT. 
53.	The Gate (advertising) – £20,000 + VAT.
54.	FT (advertising) - £8,000 + VAT.
55.	In the bundles provided to the Tribunal were other invoices disclosed during the pre-trial discovery process, which both parties confirmed did not need to be considered by the Tribunal.
56.	Mr Leo’s evidence was that all the acquisition transaction costs (which he estimated at £150 million in aggregate) were accounted for under International Financial Reporting Standard 3 (business combinations) as part of the cost of the investment in BAA.  In the consolidated financial statements the cost of the investment was eliminated against the fair value of net assets of the BAA group acquired, resulting in goodwill as the difference between the cost and the fair value.  This goodwill was included in the “intangible assets” caption in the consolidated balance sheet.
After the takeover
57.	Mr Bullón’s evidence was that the services provided by ADIL were the management of the BAA airports business from the top as a holding company, including provision of directors’ services.  ADIL provided strategic advice and direction to the BAA group.
58.	Mr Leo’s evidence covered the period from the commencement of his involvement in October 2006.  BAA (that is, BAA plc which by this time had changed its name to BAA Airports Limited – see Appendix 1) had a “shared services agreement” with the airport operating companies.  BAA employed all the employees.  The airports comprised two sets: the regulated airports (Heathrow, Gatwick and Stansted) and the non-regulated airports.  Service charges made to the regulated airports were subject to regulatory scrutiny, as the cost base of those airports was relevant to the setting of permitted tariffs.  Also, the financing of the regulated airports was complex as it could involve some public finance.  Corporate governance was at the level of ADIL, and was provided to both the regulated and unregulated airports.  Intragroup financing arrangements were run through BAA.  ADIL operated currency hedging arrangements on behalf of the whole group.  ADIL provided governance and direction and was “the single brain in the group”.
59.	Mr Anderson submitted this strategic governance was nothing more than what necessarily followed from being a 100% shareholder.  While it was true that ADIL could give direction, that was because at that level of shareholding the shareholder had an ability to influence the strategic direction of the subsidiaries. 
The refinancing
60.	Both counsel referred the Tribunal to two documents in relation to the refinancing exercise undertaken post-takeover.
(1)	A PowerPoint presentation (45 slides) given as part of a “bank meeting presentation” on 17 July 2006 (“the Bank Presentation”).
(2)	A PowerPoint presentation (40 slides) given as part of a “presentation to Moody’s” on “BAA permanent structured financing” on 18 September 2006 (“the Rating Presentation”).
61.	Both counsel submitted that the contents of the Bank Presentation and the Rating Presentation supported points they maintained in relation to the status and activities of ADIL.  The documentation comprised a hard copy of the PowerPoint slides used in those presentations.  Without disputing the contents of those slides, the Tribunal considers they are by their nature a compressed and abbreviated form of delivery of information, comprising mainly bullet-point lists and diagrams, designed for what were in effect two marketing presentations.  
62.	The Bank Presentation contains the following passages:
[slide 15] There is a “two-stage financing plan to fund the acquisition of BAA and ongoing capital expenditure.  The first stage consists of senior and junior facilities to fund the acquisition, capital expenditure and working capital needs.  In the second stage, the entirety of the senior facilities and part of the junior facility would be refinanced with a longer-term financing structure – the permanent financing.”
[slide 39] “It is intended that the senior facilities will be refinanced with … the permanent financing within 2 years.”  
63.	Mr Southern submitted this demonstrated the finance plan constituted a seamless process.  The Bank Presentation was less than three weeks after the takeover offer went unconditional, and was the second stage of a single exercise.
64.	Mr Anderson submitted there were two separate stages: pre-acquisition and post-acquisition.  The refinancing being proposed in the Bank Presentation was post-acquisition and distinct from the first stage finance raised pre-acquisition for the purposes of funding the purchase of the BAA shares.
65.	The Rating Presentation contains the following passages:
[slide 6] “[ADIL] has now received 99.99% acceptances for the share capital of [BAA].  A small number of remaining options will be exercised or cancelled over the coming weeks to complete the squeeze out.  BAA was de-listed on 15 August 2006.  The vast majority of the BAA management team have agreed contracts to remain in the business.  The integration proceeded as planned and is completed.  [ADIL] and BAA have agreed a common strategy and have been developing the medium term business plan which will be submitted to the CAA … Project teams have been established by BAA and [ADIL] to implement the business plan and the permanent financing.”
[slide 7]  “The shareholders of [ADIL] are pursuing a strategy of focusing on long-term investment in airport infrastructure.”
66.	Mr Southern submitted this demonstrated that the intention and purpose of ADIL was not merely the acquisition of the shares of BAA but instead to participate in the strategy and business planning of the UK airports business.  The purchase of the shares was not an end in itself but just a means to an end.  ADIL was an integrated part of the BAA airports business
67.	Mr Anderson submitted that although the presentation was in the name of ADIL, it was really made on behalf of the members of the consortium.  ADIL’s only role was the holding of the BAA shares.
68.	Mr Leo’s evidence was that ADIL actively engaged with the existing bank syndicate, needing to renegotiate certain terms of the existing facilities to permit changes to accounting reference dates, obtain consents to retention of pre-existing debt in the expanded group, waiver of immediate repayment triggers, and other items.  
69.	The refinancing was effected in July 2008 by means of sophisticated arrangements including a securitisation issue.  The Tribunal was referred to at least some of the documentation involved in this exercise (for example, a 500 page bond prospectus for a Jersey company called BAA Funding Limited) but for the purposes of this decision notice it is necessary to note only:
(1)	The refinancing did take place within the two year period stated in the Bank Presentation and within the 36 month period stated in the Macquarie engagement letter.
(2)	Some members of the professional advisory team had also been involved on the takeover bid.
Joining the VAT group
70.	On 21 September 2006 ADIL (and other companies) made an application to HMRC to join the BAA VAT group.  Section 8 of the application form stated, “Total expected annual value of “taxable” supplies to fellow group members: £100,000”.  The covering letter sated: 
“BAA plc has recently been the subject of an acquisition and the companies to be included in the group are the new holding companies for the BAA group.  While these companies are unlikely to make supplies outside of the group, charges for management and administrative services will flow between existing members of the group and the new members.”
71.	HMRC declined to accept the admission of ADIL to the VAT group because they believed ADIL lacked a fixed place of establishment in the UK.  HMRC also asked for supporting documentation in respect of the deducted input tax attributable to ADIL. There was correspondence on these issues and, in view of the uncertainty, BAA made protective disclosures in respect of the VAT incurred by ADIL.  
72.	As part of that correspondence, on 8 December 2006 BAA wrote to HMRC and, referring to the invoices paid by ADIL, stated:
“The costs relate to the acquisition of the BAA group.  …
I confirm your understanding that currently there is no intention for supplies to be made by the above companies [these include ADIL] to persons outside the VAT group.  To date, no supplies have been made to companies within the VAT group but intra-group supplies of technical/advisory services are likely to be made in the future.  Also, if the securitisation of the regulated airports goes ahead the companies may make taxable supplies of technical/advisory services to the regulated companies which will be separately registered for VAT.
Notwithstanding the intention to make taxable supplies, it is my understanding that the companies are entitled to be included within the VAT group registration and to recover VAT on the costs of acquiring the BAA group.  [HMRC’s] policy on holding companies and recovery of VAT on acquisition costs is set out in C&E Press Notice 59.93, 10 September 1993.  The Notice states that “… holding companies are liable to be registered for VAT, where they have taxable trading activities, supply management services to subsidiaries, or are included in a VAT group with trading subsidiaries.”  [emphasis in original]
HMRC’s policy is that input tax on the costs of acquiring companies is to be treated as residual VAT.  Consequently, [the representative member of the VAT group] has recovered the VAT on these costs in accordance with its partial exemption method calculation for overhead costs.”
73.	In an email sent on 18 January 2007 HMRC agreed that ADIL should be admitted to the VAT group with effect from 22 September 2006 – ie the date of receipt of ADIL’s original application.  That was confirmed by HMRC in a letter dated 31 January 2007.  
74.	Mrs Warren’s evidence was that the BAA VAT group comprised over 50 companies, many of which were dormant.  It included everything in the BAA group except certain duty-free retail sales operations.  From early July 2006 (ie immediately following the takeover) Mrs Warren discussed with the head of tax at BAA the VAT position of ADIL, proposing that ADIL should be included in the BAA VAT group registration.  This was the easiest course of action administratively and dealt with ADIL in the same manner as almost all other members of the group.  Following discussions with Ferrovial’s head of tax it was confirmed that ADIL (and three other holding companies) would join the VAT group.  Mrs Warren corresponded with the Ferrovial tax department to obtain the information necessary for the application forms.  She liaised with Freshfields to complete the forms and ensure the directors of ADIL (and the other companies) were fully aware of the issue of joint and several liability of group members in relation to VAT (see s 43(1) VATA).  There was a delay over the Summer of 2006 as most of the Spanish executives were on vacation and a board meeting could not be convened until their return.  She liaised with the Ferrovial tax department and ADIL’s accountant to have ADIL’s VAT invoices sent or redirected to her, for inclusion in the group VAT return.  There were further delays as the internal financial reporting structures were still being put in place following the takeover.  She scrutinised the invoices provided to her, judging some not to be eligible for inclusion (eg solicitors’ fees included as disbursements by the banks).  Having considered HMRC’s 1993 Press Notice (cited in BAA’s letter dated 8 December 2006 and discussed below) she saw no difficulty in reclaiming the VAT incurred by ADIL and assumed that ADIL’s inclusion in the group registration would be automatic.  She satisfied herself that ADIL would not be making any exempt supplies for VAT purposes. BAA’s VAT position included a partial exemption special method agreed with HMRC that allowed full reclaim of overhead VAT.  The statement on the application form that there were expected to be supplies to group members was based on her conversations with Ferrovial’s Spanish tax advisers who suggested there would be a charge from Ferrovial in Spain to ADIL which would then be recharged by ADIL; in fact no charges had been made (at least up to Mrs Warren’s move in September 2008).  
The input tax is challenged
75.	HMRC’s letter dated 31 January 2007 went on to challenge the deduction claimed in respect of the VAT incurred by ADIL, stating:
“A detailed examination of the invoices and information relating to the invoices has been undertaken.  From this examination it is clear that the costs incurred relate to the acquisition of the BAA business as a whole.  These costs of ownership are investment costs that have been incurred by [ADIL] in raising finance to acquire the BAA group.  There is no direct and immediate link between the supplies on which this VAT was incurred and any taxable supplies made (or to be made) by the BAA VAT group.”
76.	On 21 February 2007 HMRC issued a VAT assessment in the amount of £6,676,733 pursuant to s 73(2) VAT Act 1994 (“VATA”).  
77.	Correspondence and meetings followed, including a letter dated 18 July 2007 from BAA to HMRC which gave, as requested by HMRC, an analysis of the disputed costs describing the nature of the costs.
78.	Mrs Warren’s evidence was that when HMRC disputed the VAT recovery she made voluntary disclosures to protect BAA’s position, and specifically drew the invoices in question to the attention of HMRC.  The analysis in the schedule to her letter dated 18 July 2006 was provided mainly by Macquarie and partly by an accountant at Ferrovial.
Conclusions and findings of fact
79.	From the documents and oral evidence provided, the Tribunal draws the following conclusions and makes the following findings of fact.
80.	The purpose of ADIL was not only to acquire the BAA shares but also to provide high level strategic governance of the ongoing group.  As stated in its formal offer document (see paragraph 41 above) ADIL saw the takeover not as an end in itself but instead as the first, necessary step towards long term, large investment in UK airport infrastructure.  Transport infrastructure was already the main business of Ferrovial, who comprised over 60% of the consortium. The senior B debt facility raised by ADIL was specifically earmarked to fund BA’s £2 billion capital expenditure projects.  The fact of the refinancing and the post-transaction internal re-organisations were evidence of strategic input by ADIL.  (See, in particular, the evidence of Mr Bullón.)
81.	From the completion of the takeover in late June 2006 (when Mrs Warren and her colleagues became involved) it was expected that ADIL would charge its subsidiaries fees for its services.  However, no such charges were ever levied. (See, in particular, the evidence of Mrs Warren, the application form and covering letter, and BAA’s letter to HMRC dated 8 December 2006.)  It is not clear whether there was prior to the completion of the takeover an intention to make intra-group charges.  The point may not have been considered, or not thought sufficiently important to warrant any deliberation.  In any event, there was no evidence before the Tribunal that such an intention was formed prior to the completion of the takeover.
82.	From the completion of the takeover in late June 2006 (when Mrs Warren and her colleagues became involved) it was intended that ADIL should become a member of the BAA VAT group, in common with almost every company in the BAA group.  Delays in submission of the application form were due to administrative delays arising from the non-availability of executive signatories.  (See, in particular, the evidence of Mrs Warren and the application form.)  Again, there was no evidence before the Tribunal that such an intention was formed prior to the completion of the takeover.
83.	HMRC’s initial refusal of the grouping application was because of an issue not pertinent to this appeal (whether ADIL possessed a fixed place of establishment in the UK).  Once that issue was resolved, HMRC agreed the application with retrospective effect and made no other objection to ADIL becoming a member of the BAA VAT group.
84.	The services provided by Macquarie under schedule 1 of their engagement letter were concerned mainly with the takeover but the resulting work product did have continuing benefit beyond the takeover.  The financial plans and business plan were used in the presentations launching the refinancing, albeit there was supplemental work on those plans post-takeover.  It was not the case that the services were exhausted by the close of the takeover; some benefits carried on directly (such as the refinancing) or indirectly (the BAA group was now open to the strategic management plans of ADIL).  Although not determinative, the accounting treatment of capitalising the transaction costs, rather than writing them off, points to the perceived continuing benefit of that expenditure.  (See, in particular, the evidence of Mr Leo and Mr Bullón.)  
85.	It is artificial to attempt to impute the actions of ADIL to the consortium members as distinct entities.  ADIL is not a “look-through”; it is the entity formed by the consortium for the purposes of holding and overseeing the BAA group.  ADIL contracted on its own behalf with counterparties such as Macquarie and Freshfields; ADIL was the bidder for the BAA shares; ADIL executed the debt facilities and initiated the refinancing.  
86.	Although ADIL had no employees (apart perhaps from its director officers) the employment method of the BAA group was to have a single employer entity (BAA) and there would then be intra-group management accounting to allocate costs.  ADIL made no charge for its services; that is not uncommon for a group holding company, although it may be relevant in relation to the VAT law.
Legal issues
87.	In this decision notice references to EC directives are to those extant at the time of the relevant transactions (rather than the principal VAT directive 2006/112/EC which came into force on 1 January 2007).
The right to deduct input tax
88.	Article 2 of EC Council Directive 67/227 (the First Directive) establishes the general features of the tax:
“The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged. 
On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components. 
The common system of value added tax shall be applied up to and including the retail trade stage.”
89.	Article 17 of EC Council Directive 77/388 (the Sixth Directive) states (so far as relevant):
“1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.
2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:   
(a)     value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;…”
90.	Article 17(5) of the Sixth Directive covers the position commonly known in the UK as partial exemption: 
“As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.”  
91.	In the current case this complication does not arise.  HMRC say that none of the input tax is recoverable but this does not depend on the nature of the outputs of the BAA Group.  If the input tax is recoverable then the calculation will be by reference to the BAA Group’s input tax reclaim status in relation to its overhead expenditure incurred on its general business dealings.  This had been agreed as fully recoverable, pursuant to BAA’s partial exemption special method (discussed below).  Thus the current case does not concern a denial of part or all of an amount of input tax because of the partial exemption principle in article 17(5) (and given effect in UK domestic law by Part XIV of the Value Added Tax Regulations 1995 SI 1995/2518 (“the Regulations”) made under s 26 of the Value Added Tax Act 1994 (“VATA”)). 
92.	Turning to the UK domestic legislation, ss 24 and 26 VATA provide (so far as relevant): 
“Section 24 (1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say—   
(a)     VAT on the supply to him of any goods or services;   
(b)     VAT on the acquisition by him from another member State of any goods; and   
(c)     VAT paid or payable by him on the importation of any goods from a place outside the member States,
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”
“Section 26 (1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—   
(a)     taxable supplies;   
(b)     supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;   
(c)     such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.”
93.	In D.A. Rompelman and E.A. Rompelman-Van Deelen v Minister van Financiën [1985] ECR 655 the ECJ expressed the basic principle (at para 19): 
“… the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities.  The common system of VAT therefore ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way.”
94.	The Advocate General in Zita Modes Sàrl v Administration de l'Enregistrment et des Domaines [2005] STC 1059 expressed it thus (at 1064):
“The deduction system is thus designed to avoid a cumulative effect where VAT has already been levied on goods and/or services used in order to produce those supplied or, in other words, to avoid VAT being levied anew on VAT already charged. A chain of transactions builds up, in which the net amount payable in respect of each link—that is to say the total amount chargeable in respect of the supply in question, minus the amounts already charged on inputs—is a specified proportion of the value added at that stage. When the chain comes to an end with a supply to a final consumer, the total amount levied—and ultimately borne by that consumer, since the various traders in the chain will have been able to deduct all the amounts paid by them—will have been the relevant proportion of the final price.”  
The importance of an “economic activity”
95.	Core to the concept of an ability to recover input tax is the requirement of carrying on an “economic activity”.  Article 4 of the Sixth Directive states: 
“1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.
3. Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 …”
96.	The UK domestic legislation (for example section 4 VATA) uses the word “business” but as the majority of the case law cited to the Tribunal uses the phrase “economic activity”, that is followed in this decision notice.
97.	The Advocate General in Banque Bruxelles Lambert SA  v Belgian State [2004] STC 1643 (“BBL”) provided a useful summary of the concept (at 1647):
“… 'economic activity' must therefore be construed as meaning an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating profit. It is to be noted that this interpretation is quite different compared with the interpretation of 'economic activity' in other sectors such as competition law, where it also has the purpose of determining the scope of application of Community law (see, in particular, Höfner and Elser v Macrotron GmbH (Case C-41/90) [1991] ECR I-1979). In the tax field, the concept of economic activity is based on a double criterion, not only a functional criterion relating to activity but also and above all a structural criterion relating to organisation. Such a definition is in accordance with the objective of the common system of VAT, which is to treat, for the purposes of the tax, all active persons established on Community territory equally.”
98.	The ECJ has on several occasions had to consider whether investment activities constitute an economic activity.  In Kretztechnik AG v Finanzamt Linz [2005] STC 1118 the ECJ summarised the position (at 1130): 
“It is settled case law that the mere acquisition and holding of shares is not to be regarded as an economic activity within the meaning of the Sixth Directive. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property and is not the product of any economic activity within the meaning of that directive (see Harnas & Helm, para 15; KapHag, para 38, and Banque Bruxelles Lambert SA (BBL) v Belgium (Case C-8/03) [2004] STC 1643, para 38).”   
99.	In Kretztechnik the activity under scrutiny was securities dealing – which was held to be an economic activity, but one giving rise to exempt outputs.  It is common ground that ADIL’s activities were not those of a share dealer.
100.	In Wellcome Trust Ltd v Customs and Excise Commissioners [1996] STC 945 the ECJ held that a charitable trust was not carrying on an economic activity when it disposed of shares (in the Wellcome Foundation) it held as investments.  This was despite the fact that the disposals were very considerable in size, that the trust retained a number of investment managers, and that the activities were sizeable and organised in a professional manner.  It was common ground (as in the current appeal) that the trust’s activities were not those of  a dealer in securities.  The ECJ said (at 959-960): 
“34. Now, the trust manages the assets it holds, consisting in part of its shareholding in the foundation and of other financial instruments. Its investment activities, as described above, consist essentially in the acquisition and sale of shares and other securities with a view to maximising the dividends and capital yields which are destined for the promotion of medical research.
35. It is true that, by virtue of art 13B(d)(5) of the Sixth Directive, transactions in shares, interests in companies or associations, debentures and other securities may fall within the scope of VAT. This will be the case, in particular, where such transactions are effected as part of a commercial share-dealing activity or in order to secure a direct or indirect involvement in the management of the companies in which the holding has been acquired (see Polysar Investments Netherlands BV [1993] STC 222 at 239). However, as is clear from the order for reference, the trust is forbidden to engage in precisely such activities, being required to make all reasonable efforts to avoid engaging in trade when exercising its powers and being precluded from taking majority holdings in other companies.
36. Consequently, and irrespective whether the activities in question are similar to those of an investment trust or a pension fund, the conclusion must be that a trust which is in a position such as that described by the referring tribunal must, in the light of art 4 of the Sixth Directive, be regarded as confining its activities to managing an investment portfolio in the same way as a private investor. 
37. Furthermore, contrary to the arguments of the trust, neither the scale of a share sale, such as the second share sale carried out in this case, nor the employment, in connection with such a sale, of consultancy undertakings can constitute criteria for distinguishing between the activities of a private investor, which fall outside the scope of the Sixth Directive, and those of an investor whose transactions constitute an economic activity. Apart from the fact that large share sales may also be carried out by private investors, the trust's argument, if accepted, would mean that the classification of a transaction as an economic activity would depend on the investor's skill and experience.”
101.	The passage in Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen, Arnhem [1993] STC 222 at 239 cited in Wellcome reads: 
“The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purposes of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property.  It is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder.
… art 4 of the Sixth Directive is to be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of a taxable person for the purpose of VAT and therefore has no right to deduct tax under art 17 of the Sixth Directive.”

102.	The Court in Polysar did not comment further on the meaning of “direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder.”  The Advocate General devotes some space to this in his opinion (at 233): 
“The national court has pointed out that Polysar's activities are concerned solely with the holding of shares in subsidiary companies. It seems to me that such activities, which are undertaken in the exercise of shareholders' rights, do not constitute 'economic activities' within the meaning of the directive. The exercise of those rights includes, for instance, participation in the general meeting of the subsidiary's shareholders, the exercise of the right to vote at the meeting and the possibility of influencing company policy thereby and, where appropriate, involvement in the decision appointing the company's directors or officers and/or apportioning the subsidiary's profits, as well as the receipt of any dividends declared by the subsidiary or the exercise of shareholders' preferential rights or options.
In addition to the aforesaid activities which a holding company carries on as a shareholder in other companies, there are activities which, like any other company, it carries on through its organs and which, in so far as they are conducted within the company (in its relations with the shareholders and the company's organs) also cannot be regarded as 'economic activities', within the meaning of the Sixth Directive. Those activities include the administration of the holding company, the making up of the annual accounts, the organisation of the general meeting, the decision to spend the holding company's profits and to declare (and possibly pay out) dividends.
Nor, in my view, is there any question of economic activities independently carried on within the meaning of art 4(1) of the Sixth Directive in the case of activities which the holding company, or persons acting in its name, carries out in its capacity as director or officer of a subsidiary company. A director or officer of the company does not act on his own behalf but only binds the (subsidiary) company whose instrument he is; in other words, where he acts in the exercise of his duties under the company instruments, there is no question of his acting 'independently'. In that regard, his actions must be equated with those of an employee who, as art 4(4) of the Sixth Directive expressly states, does not act 'independently'.”  
The Advocate General (ibid) described such activities as 
“activities … concerned solely with the holding of shares in subsidiary companies and with the exercise of the rights connected therewith, or which do not go beyond the internal structure (of the holding or subsidiary company) …”.
103.	In Floridienne SA and another v Belgian State [2000] STC 1044 the ECJ referred (at 1060) to Polysar and said: 
“It follows that involvement … in the management of subsidiaries must be regarded as an economic activity within the meaning of art 4(2) of the Sixth Directive, in so far as it entails carrying out transactions which are subject to VAT by virtue of art 2 of that Directive, such as the supply by Floridienne … of administrative, accounting and information technology services to their subsidiaries.”
The ECJ also said (at 1062), 
“Where a holding company makes capital available to its subsidiaries, that activity may of itself be considered an economic activity, consisting in exploiting that capital with a view to obtaining income by way of interest therefrom on a continuing basis, provided that it is not carried out merely on an occasional basis and is not confined to managing an investment portfolio in the same way as a private investor (see, to that effect, Wellcome Trust Ltd … at 959–960; and Enkler v Finanzamt Homburg (Case C-230/94) [1996] STC 1316 at 1332) and provided that it is carried out with a business or commercial purpose characterised by, in particular, a concern to maximise returns on capital investment.”
104.	In Cibo Participations SA v Directeur régional des impôts du Nord-Pas-de-Calais [2002] STC 460 one question posed by the French court to the ECJ was “what are the criteria for establishing whether the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of art 4(2) of the Sixth Directive[?]”.
105.	Referring primarily to Polysar and Floridienne the ECJ states (at 474 - para 18 of the judgment), 
“The court has consistently held that art 4 of the Sixth Directive must be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of taxable person and has no right to deduct tax under art 17 of the Sixth Directive.”
In paras 19 – 21 of the judgment: 
“It is clear from case law that that conclusion is based, amongst other things, on the finding that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property.  However, the court has held that it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder.  It is clear … that direct or indirect involvement in the management of subsidiaries must be regarded as an economic activity within the meaning of art 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of art 2 of that Directive, such as the supply by a holding company … of administrative, financial, commercial and technical services to its subsidiaries.”
In para 22: 
“The answer to the first question referred for a preliminary ruling must therefore be that the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of art 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of art 2 of that Directive, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services.”
106.	The Court did not consider the Polysar “involvement” criteria, but the Advocate General said the following (at 467): 
“The forms of 'involvement' in the management of subsidiaries that are listed in para 19 of the judgment in Floridienne … include examples of activities for the purposes of art 2 of the Sixth Directive. In theory, any economic activity within the meaning of art 4(2) of the Sixth Directive may, in so far as it entails carrying out transactions subject to VAT by virtue of art 2 of the Sixth Directive, be 'involvement'.
16. Therefore, where a holding company does not just own shares, but in addition provides services to its subsidiaries in return for a fee—in which case it is ex hypothesi a mixed holding company—it becomes a taxable person in connection with those economic transactions, because such activities are, in contrast to the mere acquisition and ownership of shares, to be regarded as economic activities within the meaning of the Sixth Directive (see Polysar …).
17. Finally, it is to be noted that it cannot be for the court to provide an exhaustive list of all conceivable (economic) activities that may in principle fall within arts 2 or 4(2) of the Sixth Directive. Rather, it is for the national court to determine whether the criteria provided by the court are applicable to the actual facts of the case before it.
18. Thus, the answer to the first question referred by the national court should, in my view, be that there is 'involvement' of a holding company in its subsidiary where, in addition to exercising its shareholder rights, the holding company also carries out for its subsidiary economic activities within the meaning of art 4(2) of the Sixth Directive, entailing the carrying out of activities which are subject to VAT under art 2 of the Sixth Directive.”
107.	In Rompelman it was held that acts preparatory to carrying on an economic activity constitute part of that economic activity.  The taxpayers purchased commercial property off-plan and reclaimed the input tax incurred; the Belgian tax authorities asserted there could be no repayment until the property was built and income-producing as that was when the taxpayer had an economic activity.  The ECJ ruled (at paragraphs 19-23), 
“…the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT therefore ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way . … the preparatory acts, such as the acquisition of assets and therefore the purchase of immovable property, which form part of those transactions must themselves be treated as constituting economic activity.   … the principle that VAT should be neutral as regards the tax burden on a business requires that the first investment expenditure incurred for the purposes of and with the view to commencing a business must be regarded as an economic activity. It would be contrary to that principle if such an activity did not commence until the property was actually exploited, that is to say until it began to yield taxable income. Any other interpretation of article 4 of the sixth directive would burden the trader with the cost of VAT in the course of his economic activity without allowing him to deduct it in accordance with article 17 and would create an arbitrary distinction between investment expenditure incurred before actual exploitation of immovable property and expenditure incurred during exploitation. ….  anyone who carries out such investment transactions which are closely connected with and necessary for the future exportation of immovable property must therefore be regarded as a taxable person within the meaning of article 4 .”  
108.	In Belgium v Ghent Coal Terminal NV [1998] STC 260 a proposed commercial property development was frustrated by state compulsory purchase of the site.  The taxpayer claimed refund of input tax despite never having carried out taxable transactions due to circumstances beyond its control.  The ECJ held (at 273): 
“…art 17 of the Sixth Directive must be construed as allowing a taxable person acting as such to deduct the VAT payable by him on goods or services supplied to him for the purpose of investment work intended to be used in connection with taxable transactions. The right to deduct remains acquired where, by reason of circumstances beyond his control, the taxable person has never made use of those goods or services for the purpose of carrying out taxable transactions.”
109.	Mr Southern also referred the Tribunal to the following cases in relation to this aspect:  Mayflower Theatre Trust Ltd v Revenue and Customs Commissioners [2007] STC 880; Commission v France (case 50/87) [1983] ECR 4797; Welthgrove BV v Staatssecretaris van Financien (case C-102/00); Waterscap Zeeuws Vlaanderen v Staatssecretaris van Financien (case C-378/02; KapHag Renditefonds v Finanzamt Charlottenburg (case C-442/01) [2005] STC 1506; Securenta Göttinger Immobilienanlagen und Vermöo gensmanagement AG v Finazamt Göttengen (case C-437/06) [2008] STC 3473; VNLTO v Staatssecretaris van Financien (case C-515/07) [2009] STC 935; Ministero dell’Economia e delle Finanze v Cassa di Risparmio di Firenze SpA (case C-222/04); ICAEW v C&E Comrs [1996] STC 799.
110.	Mr Southern submitted that the activities of ADIL did constitute an economic activity.  ADIL was an active manager performing a strategic management role and a financing role.  HMRC had suggested that it is possible to divide ADIL’s activities into pre-acquisition and post-acquisition, with the former being non-business and only the latter constituting business activities.  That was not supported by the evidence: ADIL was set up with view to acquiring BAA; it followed through from that to raising funds, takeover, and refinancing the group.  Even if the suggested split was conceptually possible, on the evidence that is not what ADIL did.
111.	Mr Southern further submitted that the effect of HMRC’s refusal to refund the input tax was to treat ADIL as purchasing supplies as a final consumer, and the chain of supply ending at that point; that, he said, was an impossible contention because the costs were incurred with reference to an acquisition, not a supply.  It was plain that ADIL must have been carrying on an economic activity from day one; it conducted a £12 billion take over; it procured the advancement of £2 billion by way of loan to group companies to finance the capital expenditure programme.  ADIL’s activities clearly satisfied the functional criterion set out in BBL as they were performed in a competitive market, and also the structural criterion as they involved a high degree of legal and professional organisation.  To deny input tax on acquisition costs would leave the input tax trapped in the chain of supply otherwise than as a result of an exempt supply, which was contrary to intention – see Rompelman, Abbey National, and Kretztechnik.
112.	Mr Anderson submitted that the relevant test for the Tribunal was whether ADIL was ever involved in an economic activity in the VAT sense.  Raising £12 billion may be regarded as a “market activity” but just buying shares in a listed company was not an economic activity for VAT purposes.  ADIL was the final consumer of the services and simply had no entitlement to deduct the VAT.  The authority of Articles 2 and 4 and all the relevant caselaw was that an economic activity for VAT purposes must involve effecting transactions that are themselves taxable supplies.  ADIL never fell into that category.  Neither the intention to buy shares not the intention to join a VAT group constituted an economic activity.  None of ADIL’s activities created outputs against which any inputs could be deducted.  ADIL never intended to make any taxable supplies; was not eligible to be registered in its own right; and was never a taxable person.  ADIL’s only route to registrability was to become part of the BAA VAT group and, while HMRC accepted that a holding company may become a member of a VAT group, that does not entitle it to bring with it VAT already paid and convert it into deductible input VAT for the group.  ADIL was in effect the final consumer of the supplies to which the costs related.  The Advocate General in BLP (cited below, at paragraph 32) described what is meant in this context by “final consumer”:  
“Input tax in respect of exempt transactions is not deductible in the common system of VAT, because in such a case the taxable person acts as the final consumer, since he is unable to pass the VAT onto third parties (see the judgment in Becker v Finanzamt Münster-Innenstadt (Case 8/81) [1982] ECR 53 at 75, para 44).” 
To what outputs is the VAT linked?
113.	The requirement for deductible input tax to have a direct and immediate link with taxable transactions was set out in the ECJ case of BLP Group v Customs and Excise Commissioners [1995] STC 424 where (at 437) the ECJ ruled: 
“18. Paragraph 2 of art 17 of the Sixth Directive must be interpreted in the light of para 5 of that article.
19. Paragraph 5 lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person 'both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible'. The use in that provision of the words 'for transactions' shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect.
20. That interpretation is confirmed both by art 2 of the First Directive and by art 17(3)(c) of the Sixth Directive.
21. Article 2 of the First Directive states that only the amount of tax borne directly by the various cost components of a taxable transaction may be deducted.”
114.	In Mayflower Theatre Trust Ltd v Revenue and Customs Commissioners [2007] STC 880  Carnwath LJ summarised (at 885) seven main principles on the deductibility of input tax which he described as uncontroversial:
(i)  input tax is directly attributable to a given output if it has a 'direct and immediate link' with that output (referred to as 'the BLP test'); 
(ii)  that test has been formulated in different ways over the years, for example: whether the input is a 'cost component' of the output; or whether the input is 'essential' to the particular output. Such formulations are the same in substance as the 'direct and immediate link' test; 
(iii)  the application of the BLP test is a matter of objective analysis as to how particular inputs are used and is not dependent upon establishing what is the ultimate aim pursued by the taxable person. It requires more than mere commercial links between transactions, or a 'but for' approach; 
(iv)  the test is not one of identifying what is the transaction with which the input has the most direct and immediate link, but whether there is a sufficiently direct and immediate link with a taxable economic activity; 
(v)  the test is one of mixed fact and law, and is therefore amenable to review in the higher courts, albeit the test is fact sensitive; 
(vi)  it may be necessary to determine whether, for tax purposes, a number of supplies are to be treated as elements in some over-arching single supply. If so, that supply should not be artificially split; and
(vii)  a transaction which is exempt from VAT will 'break the chain' of attribution. 

115.	Much of the VAT incurred by most businesses can clearly be directly and immediately linked to output supplies; for example, raw materials processed into components or finished goods.  However most businesses also incur significant input tax on legitimate and necessary expenditure on goods and services that are usually described by management and accountants as “overhead expenditure”.  While clearly forming part of a business’s true costs, these expenditures are less easy to link to specific outputs of the business.
116.	In Mayflower Carnwath LJ quoted Lord Millett in Customs and Excise Comrs v Redrow Group plc [1999] STC 161 where (at 169) Lord Millett defined overheads as, “the costs of goods and services which are properly incurred in the course of his business but which cannot be linked with any goods or services supplied by the taxpayer to his customers. Audit and legal fees and the cost of the office carpet are obvious examples.”
117.	Carnwarth LJ comments (at 889): 
“That explanation points to an apparent conflict with the need, under the BLP test, for a 'direct and immediate' link with a particular supply. Indeed, the European judgments show some tension between the formulaic repetition of the 'direct and immediate' test and the practical need to accommodate 'overheads', even though not directly linked with any particular supplies.”  
He found helpful the ECJ decision in Abbey National (cited below) where 
“the taxpayer carried out a sale transaction which, because it amounted to a transfer as a going concern, was not a 'supply' for VAT purposes. It incurred input tax on professional fees for services incurred directly in connection with the sale and sought to deduct that tax in its entirety. In the course of its judgment the Court of Justice explained how the fees, although not directly linked to a taxable supply, could be taken into account as 'overheads' of the business as whole, or of a distinct part of the business. It was recognised that the various services acquired to effect the transfer did not have 'a direct and immediate link with one or more output transactions' for the purpose of the deduction rules (see para 34 of the judgment), but the judgment continued:
'35. However, the costs of those services form part of the taxable person's overheads, and as such are cost components of the products of a business. Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer. Any other interpretation of art 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it … 
36. Thus in principle the various services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with the whole economic activity of that taxable person [emphasis added].'
Thus, in relation to 'overheads' which cannot be attributed to particular supplies, it is enough to establish the appropriate link with the 'whole economic activity' of the taxable person. This apparent exception to the ordinary rule seems to be justified by the need to ensure that the VAT system is 'completely neutral'.”
118.	Similarly, in Cibo (at 476) the ECJ said: 
“…expenditure incurred by a holding company in respect of the various services which it purchased in connection with the acquisition of a shareholding in a subsidiary forms part of its general costs and therefore has, in principle, a direct and immediate link with its business as a whole.”
119.	In Abbey National plc v Customs and Excise Commissioners [2001] STC 297 there was a sale of a commercial property that, because of the UK domestic rules concerning transfers of going concerns (“TOGC”) (at the relevant time art 5(1) of the Value Added Tax (Special Provisions) Order 1992, SI 1992/3129), was treated for VAT purposes as a supply outside the scope of VAT.  The UK tax authorities contended that the input tax linked to that non-supply was non-deductible.  However the ECJ rejected that contention and ruled (at 314): 
“The answer to the questions referred must therefore be that, where a member state has made use of the option in art 5(8) of the Sixth Directive, so that the transfer of a totality of assets or part thereof is regarded as not being a supply of goods, the costs incurred by the transferor for services acquired in order to effect that transfer form part of that taxable person's overheads and thus in principle have a direct and immediate link with the whole of his economic activity.”  
It should be mentioned that in Abbey National there was a further problem of partially exempt outputs, which does not arise in the current case.
120.	In Abbey National  the Advocate General opined (at 305-306): 
“The reference to cost components in BLP is a reminder of the basic principle set out in art 2 of the First Directive: 'On each transaction, value added tax ... shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.' Thus, what matters is whether the taxed input is a cost component of a taxable output, not whether the most closely-linked transaction is itself taxable. As the Commission submitted at the hearing, the conclusion to be drawn from BLP Group plc v Customs and Excise Comrs is that the question to be asked is not what is the transaction with which the cost component has the most direct and immediate link but whether there is a sufficiently direct and immediate link with a taxable economic activity. Indeed, it may be stressed that in that case the court was concerned with supplies which were not objectively linked to taxable transactions (see [1995] STC 424 at 437…). Nevertheless, it remains clear from BLP that the 'chain-breaking effect' which is an inherent feature of an exempt transaction will always prevent VAT incurred on supplies used for such a transaction from being deductible from VAT to be paid on a subsequent output supply of which the exempt transaction forms a cost component. The need for a 'direct and immediate link' thus does not refer exclusively to the very next link in the chain but serves to exclude situations where the chain has been broken by an exempt supply. [Footnoted:]  I agree here with the opinion delivered on 30 September 1999 by the Advocate General (Saggio) in Midland Bank plc v Customs and Excise Comrs (Case C-98/98) [2000] STC 501 at 512, para 29, where he considers that the words 'direct' and 'immediate' refer to a 'particularly close link between two transactions', in which no third transaction has taken place 'breaking the causal chain'.”  
121.	Mr Southern also referred the Tribunal to the following cases in relation to this aspect:  Midland Bank plc v Customs and Excise Comrs [2000] STC 501; Ghent Coal; Kretztechnik; C&E Comrs v UBAF Bank Ltd [1996] STC 372; Schemepanel Trading Ltd v C&E Comrs [1996] STC 871; Skatteverket v  AB SKF(case C-29/08).
122.	Mr Southern submitted that input tax cannot be linked to non-supplies, for example other purchases.  The input tax on ADIL’s professional fees cannot be linked to the purchase of the BAA shares by ADIL because that is a (further) input not an output of ADIL.  So long as there is no “chain-breaker” the business can carry forward the input tax for later attribution to taxable supplies.  HMRC’s analysis led to the anathema of input tax left trapped in the chain of supply with nowhere left to go – that was contrary to basic principles. The input tax stays recoverable if carried forward and linked to a taxable output.  Not to link it to any output would be contrary to the tenets of the VAT system.  There was no chain-breaking transaction - on the contrary, there was a direct link to the group outputs of the BAA group of which ADIL became a member. 
123.	Mr Anderson submitted in relation to chain-breaking that it was agreed that the VAT remains floating to be linked to outputs unless the chain is broken.  But if the relevant services have been consumed then the guillotine falls – that is the case here as ADIL was the final consumer.  
The Faxworld case
124.	It is necessary to set out the facts in Finanzamt Offenbach am Main-Land v Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR [2005] STC 1192 before moving to the legal precedent established by the ECJ in that case.  Quoting from the ECJ’s judgment (at 1205): 
“[Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR ('Faxworld GbR')] is a civil-law partnership founded on 1 October 1996 with the sole object of setting up the company Faxworld Telefonmarketing Aktiengesellschaft ('Faxworld AG').
12. As the national court explains, the establishment of an Aktiengesellschaft (German company limited by shares) may, as in the case before the national court, be preceded by a Vorgründungsgesellschaft. A Vorgründungsgesellschaft is based on a preliminary agreement between the founders of the company to co-operate with a view to establishing the Aktiengesellschaft. Therefore, if that company, once established, wishes to assume the assets, rights and obligations of the Vorgründungsgesellschaft, which are not transferred to it automatically, they must be transferred by way of a separate legal transaction.
13. Thus, as a Vorgründungsgesellschaft, Faxworld GbR rented office premises, acquired fixed assets and had fixtures and fittings installed in the office premises. It also sent introductory mailings and engaged in advertising for the company to be established. After Faxworld AG was established by notarial act of 28 November 1996, Faxworld GbR ceased activities and transferred to Faxworld AG all the previously acquired assets at their book value, for a price of just under DM 90,000. Faxworld AG was thus able to take up its commercial activities in the offices rented and equipped for its purposes by Faxworld GbR, without having to take any additional measures.
14. Therefore, in performing its sole object, Faxworld GbR effected no output transactions other than the transfer of the assets it had acquired to Faxworld AG.”  
125.	Under German domestic law the transfer of assets from the GbR to the AG was not a taxable supply (analogous to the UK concept of a transfer of a going concern).
126.	So, to summarise: (1) the sole function of the GbR, known from the outset, was to establish the AG; (2) the GbR never intended to make (and never did make) taxable supplies in its own right; (3) the GbR undertook certain preliminary transactions that resulted in assets that were always intended to be transferred (and subsequently actually were transferred) to the AG; (4) the GbR incurred German VAT on those preliminary transactions.
127.	The GbR sought to reclaim the VAT it had incurred and the German national court ruled in its favour on the grounds (para 16 of the ECJ judgment) that the GbR was an undertaking and, as such, was entitled to deduct the input tax because the principle of neutrality of VAT required that deduction, even though the GbR never intended to use the input services procured in order to effect taxable transactions itself.
128.	The decision of the ECJ (at 1209) was: 
“ … in contrast to the facts of the case giving rise to the judgment in Abbey National, the taxable person in the case before the national court, namely Faxworld GbR, as a Vorgründungsgesellschaft, did not even intend to effect itself taxable operations, its sole object being to prepare the activities of the Aktiengesellschaft (limited company). None the less, the VAT which Faxworld GbR wishes to deduct relates to supplies acquired for the purpose of effecting taxable transactions, even though those transactions were only the planned transactions of Faxworld AG.
42. In those precise circumstances, and in order to ensure the neutrality of taxation, it must be held that, where the member state has exercised the options provided for in arts 5(8) and 6(5) of the Sixth Directive, as a result of the fact that, according to those provisions, the recipient shall be treated as 'the successor to the transferor', a Vorgründungsgesellschaft, as the transferor, must be entitled to take account of the taxable transactions of the recipient, namely the Aktiengesellschaft, so as to be entitled to deduct the VAT paid on input services which have been procured for the purposes of the recipient's taxable operations.
43. Accordingly, the answer to the question referred by the Bundesfinanzhof must be that a partnership established for the sole purpose of founding a capital company is entitled to deduct the input tax paid on supplies of goods and services where its only output transaction in the performance of its object was to effect by formal act the transfer for consideration of the supplies obtained to that company once founded and where, because the member state concerned has exercised the options provided for in arts 5(8) and 6(5) of the Sixth Directive, a transfer of a totality of assets is not deemed to be a supply of goods or services.”
129.	For clarity, to restate para 42 of the judgment: where under German domestic law the AG is treated as the successor to the GbR, the GbR is entitled to take account of the taxable transactions of the AG so as to be entitled to deduct the VAT paid by the GbR on input services which have been procured for the purposes of the AG’s taxable operations.
130.	The Tribunal considers it helpful to quote at length a passage from the Advocate General’s opinion (at paragraphs 36 – 51): 
“36. Next, I should state that the result favoured by the German authorities appears to me to be inconsistent with the principle of the neutrality of VAT, in so far as it denies any right to deduct the input tax in issue, whether for Faxworld GbR or for Faxworld AG.
37. From an economic point of view, it seems clear, a single business has been set up, going through various preparatory stages before becoming operational. The continuity of the business from preparatory to operational stages—the continuity of its identity as a business—does not appear to be in any doubt. The normal operation of the VAT system requires that input tax on supplies acquired by a business at both preparatory and operational stages be deductible from its output tax (see in particular the case law cited in para 12 above).
38. Any deviation from that normal operation, and therefore from the principle of neutrality, can in my view be accepted only where there is clear authorisation in the legislation, as interpreted where appropriate by the court.
39. In the present case, from a legal point of view the preparatory and operational stages were carried out by two separate entities, a partnership and a limited company. (Although it seems plausible that the two partners in the partnership are also the (only) two shareholders in the company.) It is on that separation that the German authorities base their arguments.
40. The partnership was not set up for the purpose of effecting taxable output transactions, it did not effect any and there was at no stage any intention that it should do so. Its sole actual or intended output transaction was to sell the embryo, as yet non-operational, business to the limited company. By virtue of the German legislation implementing art 5(8) of the Sixth Directive, that transaction was not taxable. (It may be noted that under the German legislation such transactions 'are not subject to turnover tax' whereas art 5(8) authorises member states to 'consider that no supply … has taken place.' It is important none the less that a distinction be drawn between exempt supplies and those which are deemed not to have taken place (see para 10 above and para 49 below.)
41. None the less, I agree with the Commission that Faxworld GbR falls within the definition of taxable person in art 4(1) of the Sixth Directive. Its activities were undoubtedly economic in nature and neither the purpose nor the result of those activities is relevant. In that context, I consider the German government to be mistaken in its reference to Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514, a case which concerned acquisition for private use of goods subsequently used for taxable transactions. In the present case it is not questioned that the input supplies were acquired for business purposes and not for private consumption.
42. Furthermore, the right to deduct is not lost because no taxable output supplies were in fact made—see INZO (Case C-110/94) [1996] STC 569, paras 19 and 20 of the judgment and Belgium v Ghent Coal Terminal NV (Case C-37/95) [1998] STC 260, paras 17 and 24 of the judgment—but it is necessary according to that same case law for there to have been an intention to make such supplies, and Faxworld GbR appears to have had no intention to make such supplies itself.
43. None the less, although the partnership and the limited company in the present case are two separate legal persons, there is not only a perceptible economic continuity between them but also a degree of legal continuity.
44. Article 5(8) requires that, if no supply is considered to have taken place, the recipient should be treated as the 'successor' to the transferor. In the German version of art 5(8), the comparable word 'Rechtsnachfolger' is used. The German implementing legislation speaks of 'an die Stelle treten' (taking the place of) while German law also appears to recognise a 'Fußstapfentheorie' (see para 31 above). The French and some other language versions of art 5(8) speak of 'continuing the personality' of the transferor. 
45. As I said in paras 46 and 49 of my opinion in Zita Modes Sàrl v Administration de l'Enregistrment et des Domaines (Case C-497/01) [2005] STC 1059, the various formulations clearly recall the notion of universal succession, in which one person takes over all of the rights and obligations of another (limited in this context to all of the VAT rights and obligations in relation to the business transferred), so that the transferee acquires, with the business, any outstanding VAT debts and the right to deduct any input tax not already deducted against output tax on taxable transactions. (It appears however that the VAT rules in some member states require the transferor to settle all outstanding VAT accounts prior to the transfer, so that the 'succession' in such cases is confined to adjustments pursuant to art 20 of the Sixth Directive.) In Abbey National plc v Customs and Excise Comrs (Case C-408/98) [2001] STC 297, para 38 of the opinion I suggested, using the common metaphor of a chain of transactions for VAT purposes, that whilst one link in the chain is deemed not to exist, the result is not—as would be the case for an exempt transaction—a break and a recommencement of the chain but rather a continuing sequential relationship between the links on either side.
46. In that light, is it possible to attribute Faxworld AG's intention to make taxable supplies also to Faxworld GbR, so that the conditions for the latter to enjoy a right to deduct are met?
47. Certain provisions of the legislation and indications in the case law might appear to militate against such attribution. Under art 17(1) of the Sixth Directive, the right to deduct arises at the time when the deductible tax becomes chargeable—that is to say when input supplies are acquired—and the court stated in Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514, para 8 of the judgment that 'only the capacity in which a person is acting at that time can determine the existence of the right to deduct'. At the time of acquisition, Faxworld GbR was acting as a taxable person (see para 41 above), but the supplies were not intended for taxable outputs of its own.
48. None the less, I am of the view that the 'succession' provision in art 5(8) not only justifies but requires the drawing of a significant distinction between the situation with which it is concerned and other, more usual situations.
49. It must be borne clearly in mind that the effect of applying the option in art 5(8) of the Sixth Directive cannot be to create an exempt transaction. (In para 10 I have outlined the undesirable effects which such transactions may entail.) Had that been the legislator's intention, the provision would have been included in Title X of the Directive, concerning exemptions, and not in Title V, on the definition of taxable transactions. An indication of the actual purpose is given in the explanatory memorandum to the Commission's Proposal for a Sixth Directive (see the Bulletin of the European Communities, Supplement 11/73, p 10; what is now the first sentence of art 5(8) was art 5(4) in the original proposal), in which the option was described as being available 'in the interests of simplicity and so as not to overburden the resources of the undertaking'. The point is thus to avoid often large sums of tax being invoiced, paid to the state and then recovered by way of deduction of input tax. A further advantage is to protect the revenue authorities from loss of tax if the transferor is insolvent. (See for a somewhat fuller consideration, paras 19 to 32 of my opinion in Zita Modes Sàrl v Administration de l'Enregistrment et des Domaines (Case C-497/01) [2005] STC 1059.)
50. If input VAT borne by the assets of a transferred business could not be deducted, there would be not inconsiderable distortion of competition, in comparison with other businesses. And, as the court reiterated in Abbey National plc v Customs and Excise Comrs (Case C-408/98) [2001] STC 297, para 24 of the judgment, the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities, ensuring complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT.
51. In the present case, the assets transferred were acquired by Faxworld GbR for the future purposes of taxable output transactions to be made by Faxworld AG, and thus form cost components of those transactions. There is, moreover, a direct and immediate link between the input supplies and the taxable output transactions which give rise to the right to deduct (see Abbey National, para 25 of the judgment, and the case law cited there) since, by the operation of art 5(8), no intervening transaction is deemed to have taken place between the acquisition of those supplies and their use for the purposes of the output transactions. Faxworld AG is the successor—or 'continues the person'—of Faxworld GbR. At the time when the right to deduct arose—that is to say, when the input tax became chargeable—Faxworld GbR was acting as a taxable person within the meaning of art 4(1) of the Sixth Directive. The conditions for deduction are thus in my view met.”
131.	In its decision the ECJ stated (paragraphs 25 - 28 of the judgment) (omitting here, for brevity, case citations and an alternative argument that was also unsuccessful): 
“25. As regards the classification of Faxworld GbR as a taxable person, art 4(1) of the Sixth Directive provides that any person who independently carries out in any place any economic activity specified in para 2 of that article, whatever the purpose or results of that activity, is to be regarded as a taxable person. According to para 2, the economic activities referred to in para 1 comprise all activities of producers, traders and persons supplying services.
26. Only the German government does not regard Faxworld GbR as a taxable person within the meaning of the Sixth Directive, on the ground that the partnership never carried out any economic activity. In support of that argument, it submits … that all of Faxworld GbR's input activities were intended solely to prepare the economic activities of a different legal entity which was yet to be established, namely Faxworld AG ... 
27. Those arguments cannot be upheld. First, art 4 of the Sixth Directive gives VAT a very wide scope, comprising all stages of production, distribution and the provision of services...
28. According to settled case law, a person who acquires goods for the purposes of an economic activity within the meaning of art 4 does so as a taxable person … even if the goods are not used immediately for such economic activities … Contrary to what the German government argues, the validity of those findings is in no way limited by the identity of the person whose economic activity is in question.
…
30. A partnership such as Faxworld GbR must therefore be regarded as a taxable person within the meaning of the Sixth Directive.”
132.	We return to Faxworld after considering the law relating to VAT grouping.
VAT grouping
133.	Article 4(4) of the Sixth Directive states: 
“… each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links.”  
134.	UK domestic law permits the grouping of associated companies as one business.  Section 43 VATA provides (so far as  relevant and as extant at the relevant time): 
“Where under sections 43A to 43D any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and— 
(a)     any supply of goods or services by a member of the group to another member of the group shall be disregarded; and   
(b)     any supply which is a supply to which paragraph (a) above does not apply and is a supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member; and   
(c)     any VAT paid or payable by a member of the group on the acquisition of goods from another member State or on the importation of goods from a place outside the member States shall be treated as paid or payable by the representative member … 
and all members of the group shall be liable jointly and severally for any VAT due from the representative member.”
135.	Section 43A provides (sim): 
“(1) Two or more bodies corporate are eligible to be treated as members of a group if each is established or has a fixed establishment in the United Kingdom and—   
(a)     one of them controls each of the others,   
(b)     one person (whether a body corporate or an individual) controls all of them, or   
(c)     two or more individuals carrying on a business in partnership control all of them.
(2) For the purposes of this section a body corporate shall be taken to control another body corporate if it is empowered by statute to control that body's activities or if it is that body's holding company within the meaning of section 736 of the Companies Act 1985.”
136.	In Customs and Excise Commissioners v Thorn Materials Supply Ltd and Thorn Resources Ltd [1998] STC 725 the House of Lords considered the predecessor legislation to section 43 and Lord Nolan (speaking for the majority) stated (at 733, substituting the new statutory reference): 
“… [section 43 is] not designed to confer exemption or relief from tax. [It is] designed to simplify and facilitate the collection of tax by treating the representative member as if it were carrying on all the businesses of the other members as well as its own, and dealing on behalf of them all with non-members.  … the purpose of [section 43 is] to enable a group to be treated as if it were a single taxable entity, even though it is not expressed in those terms. The section may have the effect of deferring the charge to tax upon the added value of goods until they are the subject of a supply outside the group, but it does not prevent that charge.”
137.	In Customs and Excise Commissioners v Svenska International plc [1999] STC 406 a Swedish bank (“Bank”) had in the UK both a branch (“Branch”) and also a subsidiary company (“Sub”).  Sub provided management services to Branch and charged for them.  Sub was (UK) VAT registered but Branch was not.  After Sub had incurred costs relevant to the management services it was to provide to Branch but before Branch was invoiced for those management services, Branch became a member of Sub’s VAT group.  The UK tax authorities denied Sub a deduction for the part of its input tax - relying in part on an anti-avoidance provision (“Reg 34”) that is not relevant to the current appeal.  The House of Lords found for the taxpayer.
138.	Lord Hope (one of the majority) stated (at 415, substituting the new statutory reference): 
“…[section 43] states that, where any bodies are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member. [Sub] brought with it into the group registration the amounts which had been credited to it as input tax which had been attributed to supplies which were not yet treated as taxable, and [Branch] brought into the group the value of the continuous supply of services for which it had not yet paid and not yet been issued with a tax invoice.
The question raised by [Reg 34] as to whether, after the group registration, these supplies were used or appropriated for use in making an exempt supply must be answered by applying the rule which [section 43] lays down, that any business carried on by any member of the group must be treated as carried on by the representative member. For the purposes of this exercise the business carried on by [Branch] must be treated as carried on by [Sub] as the representative member. As that business involved the making of exempt supplies outside the group to customers of [Branch], [Sub] as the representative member must be treated as having used at least part of the supplies which were attributed to an intended taxable supply for the purpose of obtaining credits of input tax in making exempt supplies. So the requirements of [Reg 34] are satisfied, with the result that [Reg 34] under which the assessments were made becomes applicable.
I think that the tribunal put the point correctly when it said that this reconstruction of the transactions for VAT purposes, so that inward supplies from outside actually made to [Sub] may be looked at with regard to the outward supplies actually made by [Branch], follows from the effect of [section 43] … 
This conclusion is not easy to grasp if regard is had to what was happening in the real world. But the statutory scheme does not always follow the real world. The guiding principle as to relief for input tax as against output tax is that of fiscal neutrality (see Rompelman …). It is satisfactory to find that the various statutory rules which must be applied in this case have produced a result which is consistent with that principle.”
139.	In Royal & Sun Alliance Insurance Group plc v Customs and Excise Commissioners [2003] STC 832 Lord Hoffmann (one of the majority) stated (at 844-845, substituting the new statutory reference but also substituting Reg 34 for its then successor): 
“In my opinion the true basis of the Svenska case is not that the taxable inputs were deemed to have been accumulated and then used all at once by [Sub] in making exempt supplies after [Sub] and Branch had become part of the same group. Nor does it decide that it is in principle possible for the commissioners under [Reg 34] to reattribute to exempt use the inputs which in real life had already been used with the intention of making taxable supplies, simply on the basis of a later change in the nature of the economic activity. That would be contrary to the principle of the Ghent Coal case. The decision in the Svenska case turned on the special effect of the grouping provisions, which, as the House decided, made it necessary to treat the inputs to [Sub] as having been inputs to the group and used by the group to make exempt supplies at the time that Branch so used them. This appears most clearly from the speech of Lord Hope … [the passage cited above].
 Thus the effect of [section 43] was that [Sub] was treated as never having carried on the economic activity of making supplies of services. It was the group which was treated as having acquired the input services supplied to [Sub] and the group which was treated as having used them for the economic activity of making exempt services supplied by Branch. The case is not authority for the proposition that, for the purposes of [Reg 34], one can retrospectively form a new intention about the use of goods or services which have already been used, like the right to occupy premises for a period which has expired.
I would therefore allow the appeal and restore the decision of the tribunal.”
140.	Both parties to the current appeal agreed that the Tribunal did not need to consider the EU or UK rules relating to the time of supply of services.
141.	The Advocate General in Polysar (at paragraph 9) opines: 
“[Article 4(4)] allows two or more persons, though legally independent and thus capable of being regarded as separate taxable persons, to be treated as a single taxable person for the purposes of the application of the common system of VAT where they are closely bound to one another by financial, economic and organisational links. The question which arises is whether that option enables a member state to treat two persons who are closely bound to one another as a single taxable person where it is established that one of those persons does not engage in any 'economic activities' within the meaning of art 4 of the directive. In my view, that question must be answered in the negative. I share the Commission's view that, in order to establish whether there is liability to tax, it is necessary to focus on the activities of each legal person separately, and not on the activities of the concern as a whole. The second sub-paragraph of art 4(4) of the Sixth Directive does not derogate from that principle: it is a rule designed to simplify matters which enables the tax authorities to treat as a single person for the purposes of the application of VAT two or more legally independent persons who engage in economic activities on their own account as a result of the close financial, economic and organisational links between them, with the result that transactions between the two do not give rise to the charging and payment of turnover tax.”  
142.	Mr Southern also referred the Tribunal to the following cases in relation to this aspect:  C&E Comrs v Kingfisher plc [1994] STC 63; C&E Comrs v Gracechurch Management Services Ltd [2007] All ER (D) 30; UBAF Bank.
143.	Mr Southern submitted that the fact that ADIL intended to group when acquiring the BAA shares meant that in VAT terms ADIL should be treated as buying the business of BAA.  The result of the purchase of shares and the intention to group taken together was that the shares are ignored and there is created the fiction of a single taxable entity.  This was supported by the case of UBAF.  The Tribunal feels that this submission goes too far and does not accept that a purchase of shares can be treated as equivalent to a purchase of the underlying business assets.
144.	Mr Anderson submitted that grouping is merely an administrative measure intended to simplify accounting and collection of VAT.  It is an option available to member states and cannot affect the fundamental principles on recoverability; otherwise it would distort the position between different member states, which would go against the principles of harmonisation and neutrality.  
HMRC publications
145.	The Tribunal were invited to consider the statements in HMRC’s own manual in relation to holding companies.  VAT Manual, volume V1-13, section 15 “Holding companies” refers to Polysar and then states: 

“15.2     What is a holding company?  
In its simplest sense, a holding company describes a company with shareholdings in one or more subsidiaries. The structure and purpose of holding companies can, however, be diverse, ranging from companies with minimal activities where shares are held in subsidiaries and dividends received, but no part is played in management of the investment, to businesses fully integrated with trading subsidiaries and where the holding company is actively concerned with the supervision and management of the subsidiaries.
The basic functions of a holding company are the: 
∙     acquisition of shares in subsidiaries;   
∙     receipt of dividends arising from the shareholdings;   
∙     defence of itself and its subsidiaries from takeovers; and   
∙     disposal of shares in subsidiaries.
These activities alone do not create 'taxable' supplies for VAT purposes and registration for VAT is not permissible if these are the only activities of the holding company.
15.3     When can a holding company register for VAT?
There are no special rules for holding companies. To be registered for VAT, the holding company must make or intend to make taxable supplies. These may consist, wholly or partly, of supplies of management services to one or more of the holding company's subsidiaries.
In instances where a holding company is registered solely because of its supplies of management services, you should satisfy yourself that the invoiced charges do represent actual supplies of services performed and are not simply charges raised on non-existent supplies in order to allow the holding company to register.
A holding company, having only the activities shown in paragraph 15.2, can join a group registration comprising some or all of its subsidiary companies provided those companies make taxable supplies outside the group. In some complex holding situations a holding company may even be registered as part of a VAT Group although the companies in which it holds shares are outside the VAT Group. The key point is that the holding company is part of a VAT Group, some of whose members make supplies outside the group.
15.4     What input tax can holding companies deduct?
Holding companies having only the non-business activities referred to in paragraph 15.2 cannot register for VAT in their own capacity and are therefore unable to recover the VAT they incur.
However, once a holding company is registered by dint of making the taxable supplies referred to in paragraph 15.3, it is for the time being entitled to treat as input tax all VAT incurred on expenditure that relates to the management of its subsidiaries including VAT that relates to the activities referred to in paragraph 15.2.
For partly exempt holding companies, input tax on overheads is treated as residual input tax.
This administrative concession is permitted in order to reduce burdens on businesses and to ensure that holding companies based in the UK receive similar treatment to that applied elsewhere in the EC.”

146.	The Tribunal was also referred to HM Customs & Excise Press Release number 59/93 dated 10 September 1993 (this was the Business Brief examined by Mrs Warren).  This includes the statement, 
“However, holding companies are liable to be registered for VAT, where they have taxable trading activities, supply management services to subsidiaries, or are included in a VAT group with trading subsidiaries.”
Submissions on Faxworld and grouping
147.	Mr Anderson submitted that Faxworld needed to be approached with caution, and that it did not support the broad proposition that one can acquire the right to deduct from the activities of another person.  Faxworld was a case confined to its very specific facts.  German domestic law made special provision for the situation where a GbR was formed solely as a preparatory step to the establishment of an AG to take over the assets of the GbR - which appeared to be a commonly encountered transaction in Germany.  That domestic provision treated the AG as the successor to the GbR.  Mr Anderson emphasised the proviso in the ECJ’s decision (at para 42, quoted above) “…where the member state has exercised the options provided for in arts 5(8) and 6(5) of the Sixth Directive, as a result of the fact that, according to those provisions, the recipient shall be treated as 'the successor to the transferor' …”.  That was not the case in the current appeal – ADIL did not, and could not, rely on any equivalent UK provision.  A TOGC involves complete legal continuity between two parties: Art 5(8) of the 6th Directive : “In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor.”  An acquisition of shares – even so as to result in complete economic ownership of the target – is not analogous.  It would be wrong to draw any conclusion broader than for a TOGC.  The ECJ in Faxworld adopted the most practical solution to ensure that start-ups in Germany were not disadvantaged by German law; the stance of the German fiscal authority would deny both parties recoverability – that was contrary to Rompelman and Ghent Coal.  In the current appeal there had been an acquisition of shares of an existing company, and Faxworld was of no assistance. This was not the same as the subsequent effect of joining a VAT group.  
148.	Mr Southern submitted that the resemblances between Faxworld and the position of ADIL were very close.  There was an acquisition of services with an intention to carry on an economic activity.  That economic activity could be carried on by another person, absent a chain-breaker transaction.  Faxworld involved a TOGC, while ADIL entered the BAA group and became fused with those companies.  The provisions of the UK rules on grouping were at least as wide if not wider than the German domestic provisions considered in Faxworld.  In Faxworld there was treatment as a successor to a transferor.  In a UK group the identities of all the members were subsumed into that of the representative member company.
149.	Mr Southern further submitted that there were two routes available for recovery of the input tax; first, ADIL could separately register for VAT and make charges to its subsidiaries; secondly, ADIL could join the BAA VAT group and so make taxable supplies as part of that group; provided that ADIL was itself carrying on an economic activity then which route was taken was a question of mechanics, to be determined by commercial considerations, but leading to the same outcome.
150.	A question posed by the Tribunal during the hearing was, if ADIL had registered for VAT (in its own right) and made charges to its subsidiaries, would the VAT in dispute have been recoverable?  While Mr Anderson was, understandably, reluctant to commit to hypotheticals, he accepted that in those exact circumstances there would have been taxable supplies, an economic activity, a direct and immediate link, and a right to recover the input tax.  However, he maintained that this analysis did not assist the taxpayer because (a) without the hypothetical intra-group charges there were no taxable (output) transactions and thus no economic activity (art 4 and Cibo); and (b) the fact that arranging its affairs differently might have improved ADIL’s position was not a relevant factor – see the ECJ in BLP (at paragraph 25 of the judgment): 
“25. It is true that an undertaking whose activity is subject to VAT is entitled to deduct the tax on the services supplied by accountants or legal advisers for the taxable person's taxable transactions and that if BLP had decided to take out a bank loan for the purpose of meeting the same requirements, it would have been entitled to deduct the VAT on the accountant's services required for that purpose. However, that is a consequence of the fact that those services, whose costs form part of the undertaking's overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions.
26. In that respect it should be noted that a trader's choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system. The principle of the neutrality of VAT, as defined in the case law of the court, does not have the scope attributed to it by BLP. That the common system of VAT ensures that all economic activities, whatever their purpose or results, are taxed in a wholly neutral way, presupposes that those activities are themselves subject to VAT (see in particular Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655 at 664, para 19).”  
Conclusions on the relevant legal issues
Did ADIL carry on an Art 4 economic activity?
151.	We conclude that, given our finding of fact at paragraph 80 above, ADIL did carry on an economic activity (within the meaning of art 4 of the Sixth Directive) from its inception, with one very important caveat.  That caveat is that (as accepted by both parties) ADIL never made an actual taxable output supply in its own right.  We address that caveat below but putting it aside for the moment, we conclude that the activities of ADIL went beyond “the mere acquisition and holding of shares” (Kretztechnik).  ADIL did not “[confine] its activities to managing an investment portfolio in the same way as a private investor” (Wellcome).  Its activities met both the functional and structural criteria put forward by the Advocate General in BBL.  Its holding of the BAA shares was “accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder” (Polysar).  Those activities went beyond “activities … concerned solely with the holding of shares in subsidiary companies and with the exercise of the rights connected therewith, or which do not go beyond the internal structure (of the holding or subsidiary company) …” (Advocate General in Polysar).  The Advocate General in Cibo noted that “… it cannot be for the court to provide an exhaustive list of all conceivable (economic) activities that may in principle fall within arts 2 or 4(2) of the Sixth Directive. Rather, it is for the national court to determine whether the criteria provided by the court are applicable to the actual facts of the case before it.”  We determine that on the facts of the current appeal ADIL carried on an economic activity from its inception.  
152.	Without limiting the generality of our conclusion on this point, we refer to the fact that the debt facilities negotiated and procured by ADIL included a £2 billion capital expenditure facility (the senior B facility) for the BAA group.  We consider that ADIL’s putting that in place and its subsequent draw down in full by the subsidiaries (see Mr Leo’s evidence) constituted making capital available to its subsidiaries as conceived in Floridienne.  Mr Anderson contended that the BAA group either already had or could have obtained such finance in its own right, and that in Floridienne “making capital available” means making loans, not just facilitating for banks to lend money.   We see no reason to take that restrictive view; the arrangement and negotiation of group finance facilities is an important role of a group holding company, and was performed actively and strategically by ADIL.
153.	HMRC had suggested that it was possible to divide ADIL’s activities into pre-acquisition and post-acquisition categories, with the former being in the nature of a final consumer and only the latter constituting an economic activity.  However, we determine that it is not the case that ADIL pursued one activity from inception until completion of the takeover, and then switched to a different activity.  Rather, from inception ADIL was conceived as and operated as the highest level of strategic and financial direction for the UK airports business within the BAA group.  Accordingly, it is not the case that VAT incurred by ADIL can or should be allocated between two accounts labelled “pre-acquisition” and “post-acquisition” activities.  Instead there is just one pool of VAT that includes, for example, the VAT on both the schedule 1 and schedule 2 charges made by Macquarie.  
Was there an intention to make taxable supplies?
154.	Turning to the caveat, there can be no economic activity without taxable supplies: “It is clear … that direct or indirect involvement in the management of subsidiaries must be regarded as an economic activity within the meaning of art 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of art 2 of that Directive …” (Cibo – at paragraph 22 – emphasis added).  It was accepted by both parties that ADIL never made an actual taxable output supply in its own right.  An intention to make taxable supplies is sufficient (even if subsequently thwarted by circumstances outside the taxpayer’s control: Ghent Coal) but from our finding of fact at paragraph 81 above, the Tribunal had no evidence of any such intention prior to the completion of the takeover.  Thus there was no evidence of ADIL having an intention to make taxable supplies as at the time it received the disputed supplies of advisory services.   
155.	Mr Southern contended that an intention to join an existing VAT group could amount to an intention to make taxable supplies, in that s 43 VATA, he maintained, equates the supplies made by the representative member of the group and the other group members; thus ADIL could look to the taxable supplies of the representative member as if they were its own.  Without expressing a view on that analysis, even if it is correct our finding of fact at paragraph 82 above – that the Tribunal had no evidence of any intention prior to the completion of the takeover for ADIL to join the BAA VAT group – means that, again, there was no evidence of ADIL having an intention to make taxable supplies as at the time it received the disputed supplies of advisory services.   
Does Faxworld extend the situation?
156.	Faxworld allows consideration of the intention to make taxable supplies by reference not just to the person incurring the VAT but also, in certain circumstances, another person.  The Advocate General in Faxworld clearly recognised that the result argued for (successfully) by the taxpayer in that case did strain certain tenets of VAT law: “… it is necessary … for there to have been an intention to make such supplies, and Faxworld GbR appears to have had no intention to make such supplies itself.” (at paragraph 42)  “… is it possible to attribute Faxworld AG's intention to make taxable supplies also to Faxworld GbR, so that the conditions for the latter to enjoy a right to deduct are met?  Certain provisions of the legislation and indications in the case law might appear to militate against such attribution.” (paragraphs 46 & 47).  However, those reservations were overwhelmed by the need for neutrality of taxation: “If input VAT borne by the assets of a transferred business could not be deducted, there would be not inconsiderable distortion of competition, in comparison with other businesses.” (paragraph 50).
157.	Is that reasoning confined, as Mr Anderson submitted, to a situation peculiar to a (German) TOGC, or can it, as Mr Southern submitted, be read into a grouping of two companies?  In Faxworld there was VAT incurred by GbR in connection with a business prepared (but never carried on) by GbR, which was then transferred to AG.  The transfer itself was a non-event for VAT purposes, being ignored under the German domestic rules for a TOGC (which were enacted pursuant to the permissive provisions of art 5).  GbR and AG were treated as transferor and transferee of an economic activity.  GbR was entitled to take advantage of the taxable transactions of AG.  Thus GbR was regarded as a taxable person within the meaning of the Sixth Directive.
158.	In the current appeal there was VAT incurred by ADIL in connection with an economic activity it expected to carry on and (bar actually making a taxable supply in its own right) it did carry on.  Performing that economic activity (involvement in the management of the BAA companies) in the context of the BAA VAT group was a non-event for VAT purposes, being ignored under the UK domestic rules for grouping – s 43(a) VATA – (which were enacted pursuant to the permissive provisions of art 4).  ADIL and the BAA companies were treated as part of a single entity for VAT purposes.  Accordingly, our conclusion is that it follows that ADIL is entitled to take advantage of the taxable transactions of the BAA VAT group, and thus be regarded as a taxable person within the meaning of the Sixth Directive.
159.	  While sharing the reservations expressed by the Advocate General in Faxworld, the Tribunal considers that the fundamental principle of neutrality of taxation (Rompelman) requires, by the same process as adopted by the ECJ in Faxworld, that the taxable supplies of the BAA VAT group should be imputed to ADIL, so that the caveat referred to above is removed.  To quote again Lord Hope in Svenska (already cited) on the grouping provisions: “This conclusion is not easy to grasp if regard is had to what was happening in the real world. But the statutory scheme does not always follow the real world. The guiding principle as to relief for input tax as against output tax is that of fiscal neutrality (see Rompelman …). It is satisfactory to find that the various statutory rules which must be applied in this case have produced a result which is consistent with that principle.”
To what output supplies is the input tax linked?
160.	Following Faxworld there should be a direct and immediate link to the output supplies taken into consideration in determining the existence of an economic activity (see paragraph 51 of the Advocate General’s opinion).  Given that ADIL is a member of the BAA VAT group the direct and immediate link is to the outputs of the representative member of that group (s 43(b) VATA).
161.	Mr Anderson submitted that the VAT incurred by ADIL could not have been incurred for the purposes of the BAA group’s business because it related to advice given in connection with a takeover bid that was, at least initially, hostile.  However, the Tribunal considers that if a commercial dispute arises between two members of a VAT group and each company takes independent legal advice then the VAT on the fees of both advisers would be input tax of the representative member of the VAT group, notwithstanding that the protagonists and their respective advisers had directly opposite interests in the dispute.  Both lots of input tax would be recoverable by the representative member in the normal manner.  That is merely an artefact of the grouping provisions and, while it may appear an odd result, it is entirely consistent with the scheme of the grouping provisions.  
162.	Absent a group situation the direct and immediate link is with general overheads:  Cibo (at 476), quoted at paragraph 118 above.  We consider that the same result should follow in a VAT group, so that the direct and immediate link is with the general overheads of the representative member of the group.  We note that that conclusion is not inconsistent with the views of HMRC expressed in their publications referred to at paragraphs 145 and 146 above.
Decision
163.	For the reasons set out above the appeal is allowed.
Other Matters
Identity of the Appellant
164.	The appeal was made by a notice of appeal issued on 6 June 2007.  At that date the representative member of the BAA VAT group was the company then called BAA Limited (which at the time of the takeover was called BAA plc) (being company number 1970855) (see Appendix 1).  On 6 October 2008 ADIL (being company number 5757208) changed its name to BAA Limited and became the representative member of the BAA VAT group.  At the same time the company previously called BAA Limited changed its name to BAA Airports Limited.   The appellant is still listed as BAA Limited, but that is the old representative member (company number 1970855), not the current representative member (company number 5757208) even though the latter is now called BAA Limited.  
165.	The question arises, should the appellant continue to be company number 1970855 or, given that it is no longer the representative member of the BAA VAT group, should there be a substitution (pursuant to Rule 9 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273)) of company number 5757208, which has taken over as representative member?    Although there was no agreed conclusion between the parties, Mr Anderson for HMRC confirmed that they would have no objection to an application for substitution if that were required or desirable.  The Tribunal was invited to leave the matter there for further consideration at a later stage if necessary.
Costs
166.	The appeal was made by a notice of appeal issued on 6 June 2007 and was heard in June 2009.  Thus the appeal constitutes “current proceedings” as defined by paragraph 1(2) of schedule 3 of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 SI 2009/56.  Accordingly, as confirmed to the parties at the commencement of the hearing, the Tribunal, under paragraph 7 of schedule 3, applies Regulation 29 (Awards and directions as to costs) of the VAT Tribunals Rules 1986 SI 1986/590 to the current proceedings.
167.	Mr Southern made an application for costs.  We see no reason why the costs should not follow the outcome of this appeal.  Accordingly, we direct that HMRC pay the Appellant’s costs of the appeal on the standard basis, the amount unless agreed to be taxed under Rule 29(1)(b) of the VAT Tribunal Rules 1986 (SI 1986/590) by a Costs Judge of the Senior Courts.
Right of appeal to Upper Tribunal
168.	Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision and state the result the party making the application is seeking.
169.	This document contains the full written findings of fact and reasons for the Decision.

PETER KEMPSTER

TRIBUNAL JUDGE
RELEASE DATE: 28 January 2010

APPENDIX

GUIDE TO COMPANY NAMES

FGP Topco Limited (company number 5723961 incorporated on 28 February 2006)	

FGP Holdco Limited (company number 5723977 incorporated on 28 February 2006) became

FGP Holdco 1 Limited on 27 March 2006 and then

ADI Finance 1 Limited on 6 April 2006

FGP Bidco Limited (company number 5723973 incorporated on 28 February 2006)
became

FGP Holdco 2 Limited on 27 March 2006 and then

ADI Finance 2 Limited on 6 April 2006

FGP Bidco 1 Limited (company number 5757208 incorporated on 27 March 2006)
became     

FGP Bidco Ltd on 30 March 2006 and then    

FGP Bidco Limited on 4 April 2006 and then

Airports Development and Investment Limited on 6 April 2006 and then

BAA Limited on 6 October 2008  

BAA plc (company number 1970855 incorporated on 13 December 1985) became

BAA Limited on 15 August 2006 and then became

BAA Airports Limited on 6 October 2008