It will not be new that certain supplies made by corporate finance companies may fall within the scope of the VAT exemption for the supply of intermediary services – meaning that no VAT will be due on the charges billed. However, it should be noted that potential clients of corporate finance companies may not be aware of this point. In a recent transaction we worked on, a vendor chose a particular corporate finance company over others, in part because that entity’s pitch stated that they would not charge the VAT on its costs. It is therefore appropriate to consider when this VAT exemption may be of particular value to a potential customer and, if so, to bring it to his attention.
Conditions and type of service to be provided
To benefit from the exemption, an intermediary must meet the following criteria:
- it must connect a person seeking a financial service with a person who provides a financial service;
- it must intervene between the parties to a contract and act as an intermediary; and
- he must undertake preparatory work for the execution of a contract for the provision of financial services, whether or not it is carried out.
In the case of securities, if the intermediary brings people seeking to buy or sell shares, the service can be exempted without any work related to the preparation of a contract having to be undertaken.
The specific services that will fall under the VAT exemption therefore include:
- coordinate negotiations;
- coordinate and provide a central point for other advisors or services necessary for the transaction; and
- dealing with regulatory authorities.
General advisory services provided to a client (eg general queries on raising capital without any specific transaction in mind) will not be exempt. The advice must lead to or be associated with a corporate action.
For which types of customers is it particularly relevant?
- Individuals acting in a personal capacity – not paying VAT will always be attractive to people who are generally unable to reclaim the VAT they incur.
- Exempt or partially exempt businesses – if a business makes exempt supplies (such as financial services or certain rental of goods), it will not be able to reclaim all of the VAT it incurs. These businesses will therefore want to keep the VAT incurred as low as possible.
- Special purpose vehicles – following the judgment of the Court of Appeal in BAA Limited v Revenue and Customs Commissioners in February 2013, the ability of SPVs, which were created to take over companies, to recover VAT was limited. The mere acquisition and holding of shares in a subsidiary does not in itself constitute economic activity for VAT purposes and, without economic activity, the SPV does not make taxable supplies and is not able to recover VAT. There are ways to maximize the chances of an SPV reclaiming VAT, but if a corporate finance company can be classified as an intermediary and therefore make VAT-exempt supplies, that’s one less VAT charge for the SPV.
If you have any questions about this VAT exemption and how it might apply to you, please do not hesitate to contact a member of the Squire Sanders Tax Strategy & Benefits team.