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UK Tax Authority Expands On VAT Reclamation For Share Issues

by Robin Pilgrim,, London

24 November 2005

After the European Court of Justice last June ruled that companies could recover VAT they had paid on costs associated with exchange listings and new share issues, the UK's tax authority gave a narrow interpretation to the ruling; it has now issued more detailed guidance on the subject.

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.

'Companies that make a first issue of shares in circumstances that are the same as those in Kretztechnik's case,' said HM Revenue and Cusotms in June, '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.'

In its new guidance HMRC says the following:

' Businesses may issue shares of different types. For example, there may be an issue of preference shares, a special rights issue, a bonus issue or issue of scrip dividends. Kretztechnik principles are applicable to all such share issues and these are now to be regarded as non-supplies for VAT purposes.

'Transactions involving issues by different types of companies Kretztechnik was a public limited company but the body issuing shares could be another type of company, a private company for example. Provided that the issuer's motivation is, like Kretztechnik's, the raising of capital, issues of shares by these other types of company will also be non-supplies for VAT purposes.

' The issue of other types of security, such as bonds, debentures or loan notes, should also be treated as non-supplies when the purpose of the issue is to raise capital for the issuer's business. The input tax consequences will be the same as for an issue of shares. Similarly, the issue of shares or units in collective investment funds such as open-ended investment companies or authorised unit trusts will not be supplies for VAT purposes.

'An issue of shares or other securities may be one of several transactions that take place in the context of wider arrangements. For example, they may be issued in order to effect a company takeover or as part of a company restructuring through merger or demerger. When the issue does take place as part of such wider arrangements, it
should still be regarded as a non-supply for VAT purposes.

'Claims for unrecovered input tax in respect of past issues of shares and other securities can be made subject to the three-year "capping" rules. Such claims need to take into account any input tax that has been over-claimed because it has been attributed to an issue of securities outside the EU. Public Notice 700/45 'How to correct VAT errors and make adjustments or claims' gives detailed guidance on capping and claim procedures.

' Transfers of existing shares for a consideration will continue to be exempt supplies provided that the supplies occur in the course of business activity. In such cases, the input tax that relates to the transfer will be exempt input tax and only recoverable to the extent that the shares have been sold to purchasers outside the EU.

' There are no changes to the exemption for financial services arising from the judgment. Transactions that are no longer supplies, such as issues of shares, will no longer have a corresponding VAT liability such as exemption. However, intermediary and underwriting services in relation to such transactions will continue to be exempt.'

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