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TaxationWeb by Paul Taylor

Paul Taylor of VATease Ltd provides a layperson’s guide to a possible ‘opportunity’ for those who have issued shares or undertaken company floatations in the last 3 years.

Can I now reclaim VAT on cost relating to share issues and floatations over the last 3 years?

HM Customs & Excise are likely to have a rough time of it over the next few months as high-profile European Court Cases look set to force them to repay millions of pounds of VAT that they have previously withheld from recently floated companies and from mobile phone dealers. Most mobile phone dealers will be aware of how the up-coming decision in the Bond House Systems case will affect them but the possible consequences for UK VAT of a case fought by an Austrian company called ‘Kretztechnik’ may have passed by the FDs of UK Companies.

Background

The issue of shares, particularly when it is accompanied by a floatation, can be a very expensive undertaking. Professional fees in the region of £300,000 are not uncommon and the VAT on those fees is substantial. Historically, HM Customs & Excise have decreed that such VAT cannot be reclaimed.

Entitlement to reclaim input VAT incurred on costs is dependant upon the use to which those costs are to be put. If they are to be used to make VATable supplies (whether at 17.5%, 5% or 0%) then a VAT registered business can reclaim the input VAT. If they are to be used to make supplies that are exempt from VAT (such as medical care or, crucially, the sale of shares) then the business cannot reclaim the input VAT (a basic guide to input VAT entitlement can be found in the ‘1 minute guide to VAT’ at http://www.taxationweb.co.uk/guides/value_added_tax_vat.php).

HM Customs & Excise have always believed that an issue of new shares is the same as a sale of existing shares and is therefore exempt from VAT. They have therefore refused to pay back the VAT paid on the related professional fees.

The Affects of the Kretztechnik Case

Kretztechnik, an Austrian manufacturing company, found themselves in a very similar position with their tax authorities. It had issued shares and become listed on the German Stock Market and in the process had incurred a lot of VAT. The Austrian tax authorities refused a reclaim of this VAT on the basis that it related to the exempt issue of shares.

Kretztechnik appealed to the Austrian Tax Tribunal and the Tribunal sought clarification from the European courts on 3 questions, the important ones of which are ‘Is the issue of new shares a supply of services?’ and ‘If not, is the associated input VAT claimable?’

The case has not yet reached a conclusion. All of the arguments have been presented and the main hearing is over but the Judges are yet to make a decision. However, in European Court cases the Advocate General gives an opinion on the issue in advance of the Judges decision. In the Kretztechnik case the Advocate General’s opinion has recently been published.

The AG draws a distinction between the issue of new shares and the subsequent trading of those existing shares.

Clearly the sale of existing shares is a supply. This supply is exempted in both European and UK law and to argue any other treatment would be contrary to the intention of those laws.

With regard to the issue of shares the AG referred to another recent case, KapHag, in which it was decided that a payment by a new partner to join a partnership is not subject to VAT because no supply is made. The AG drew direct comparison between a partner’s injection of cash into a business and the issue of shares by a company. He concluded that the issue of shares should not be treated as a supply.

If there is no supply, there can be no exempt supply to which any input VAT should be associated. The AG went on further to say that the input VAT should be associated with the general running of the business, an overhead cost much like audit fees or telephone bills. Kretztechnik makes only taxable supplies (supplies subject to VAT) so the VAT on the professional fees must therefore be recoverable in full.

The Judges in the European Court do not always follow the AG’s opinion and have refused to do so in some high profile cases. However, they generally do and popular opinion in the industry seems to be that they are likely to in this case.

Implications for UK Companies

Decisions by the European Court are binding upon HM Customs & Excise and the UK VAT system.

The vast majority of UK Companies who have issued shares and/or performed a floatation over the last 3 years will not have been able to recover much, if any, of the VAT they were charged on the professional fees incurred. If the European Court Judges’ decision follows the opinion of the AG then most these companies will be able to submit a claim to HM Customs & Excise for that VAT.

Unfortunately, such claims are limited to VAT that is less than 3 years old. Any companies with input VAT that is approaching 3 years old should submit a protective claim to HM Customs & Excise immediately. It will not be paid until and unless Kretztechnik wins but it protects the company’s claim from being barred by the 3 year time limit.

Paul Taylor
VATease Ltd
March 2005

Paul Taylor is a VAT adviser for VATease Ltd, independent providers of VAT advice to professionals and industry. VATease has experience of assisting companies with recovering VAT on share issues.

For more information on this article or VATease visit their website at www.vatease.co.uk, email them at hq@vatease.co.uk or speak to Paul Taylor or Simone Hurst-Franks on 0121 778 4299.