Readers’ forum: Does dividend income affect input tax recovery?

A colleague and myself are having a healthy disagreement about input tax incurred by a holding company client which has income from dividends and management services. Both sources of income come from its trading subsidiaries. The holding company is VAT registered as are all three trading subsidiaries; none of the four companies have any exempt supplies.

My client charges VAT on the management services but dividends are outside the scope of VAT. There are no issues about the validity of the management fees because the holding company employs five staff who carry out a range of work for the trading companies and there are other shared costs.

My question is simple: can my client claim all input tax on overhead items it incurs eg professional fees telephone bills premises costs or should it apportion the claim based on the ratio of dividend versus...