Reclaiming VAT On UK Share Issues

by Jason Gorringe, Tax-News.com, London

17 June 2005

After the European Court of Justice upheld the February opinion of its Advocate General establishing the right of companies to recover VAT they have paid on costs associated with exchange listings and new share issues, the UK's tax authority has issued guidance on the subject.

Although the case in question - dealing with Austrian company Kretztechnik - was limited to the issue of new shares, most experts believe that the ruling will apply to all forms of capital-raising, and all associated costs. Thus equity, commercial paper, bonds and other instruments would be covered, and 'costs' would include corporate advisory fees, due diligence, accounting and legal fees.

Needless to say, HM Revenue & Customs is not going to give up without a fight, and does not agree with such an expansive interpretation of the ECJ's ruling.

Says Revenue and Customs:

'On 26 May 2005, the European Court of Justice (ECJ) gave its judgment in Kretztechnik. The ECJ had been asked to rule upon whether or not a first issue of shares by a public limited company is a supply and whether or not the VAT incurred on the costs of such an issue is deductible input tax. The judgment endorsed the earlier Opinion given by the Advocate General on 24 February 2005, ruling that such an issue is not a supply and that the VAT incurred on the costs is recoverable to the extent that the company's outputs are taxable transactions.

'Until now, HM Revenue & Customs' treatment of share issues has been guided by the Court of Appeal decision in Trinity Mirror plc v C & E Commissioners [2001] STC 192. This had established that the issue of shares in the UK by a company for the purpose of financing its business was an exempt supply under Item 6 of Group 5 of Schedule 9
to the VAT Act 1994. Any input tax that was attributable to the costs of making the issue was therefore generally not deductible. Kretztechnik has now established that this treatment is incorrect.

'Companies that make a first issue of shares in circumstances that are the same as those in Kretztechnik's case are now entitled to recover the input tax incurred on the costs of the issue to the extent that they make taxable supplies. Therefore companies with wholly taxable outputs will be entitled to recover all of the relevant input tax, while those with both exempt and taxable outputs will be entitled to recover a proportion in accordance with their partial exemption
method. Claims for input tax in respect of past share issues will be accepted subject to the three-year 'capping' rules.

'There are a number of other situations in which a company may issue shares where the circumstances will differ greatly from those which existed in Kretztechnik. In particular, a share issue may take place as part of a company merger, demerger or other restructuring. HM Revenue & Customs are taking legal advice on the extent to which Kretztechnik applies to these other share issue situations and further guidance will be issued to businesses after this advice has
been received. Any claims for repayment received in the interim will be acknowledged but not processed until this advice has been received.

'Businesses may raise capital through the issue of financial instruments or securities other than shares, like bonds, debentures or loan notes. Kretztechnik was concerned solely with issues of shares and the ECJ did not comment upon the extent to which the same principles would apply to other types of issues. HM Revenue & Customs are obtaining legal advice on whether or not other issue transactions are affected and will issue further guidance after the position has
been reviewed. Any claims for repayment received in the interim will be acknowledged but not processed until this advice has been received.'

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