It won’t be news that certain supplies made by corporate finance houses can fall under the VAT exemption for the supply of intermediary services - meaning no VAT will be due on the fees charged. However, it is worth noting that corporate finance houses’ potential clients may not be aware of this point. On a recent deal that we worked on, a seller chose a particular corporate finance house above others not least because that entity’s pitch had stated it would not be charging VAT on its fee. It is therefore worth considering when this VAT exemption may be of particular value to a potential client and, where appropriate, bringing it to their attention.
Conditions and the type of service to be provided
To fall within the exemption, an intermediary must meet the following criteria:
- it must bring together a person seeking a financial service with a person who provides a financial service;
- it must stand between the parties to a contract and act in an intermediary capacity; and
- it must undertake work in preparation of the completion of a contract for the provision of financial services, whether or not it is completed.
In respect of securities, if the intermediary is introducing persons seeking to purchase or sell shares to each other, the service can be exempt without any work in relation to the preparation of a contract needing to be undertaken.
The particular services that will fall under the VAT exemption therefore include:
- co-ordinating negotiations;
- co-ordinating and providing a central point for other advisers or services necessary to the deal; and
- dealing with regulatory authorities.
General advisory services provided to a client (for example, general queries on raising capital with no specific transaction in mind) will not be exempt. The advice must lead to or be associated with a transaction in securities.
Which types of clients is this particularly relevant to?
- Individuals acting in a personal capacity – not paying any VAT is always going to be attractive to individuals who are generally unable to recover any VAT they incur.
- Exempt or partially exempt businesses – if a business makes any exempt supplies (such as financial services or certain lettings of property) it will not be able to recover all of the VAT it incurs. Those businesses will therefore be keen to keep any 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 have been set up to purchase companies, to recover VAT has been limited. The mere acquisition and holding of shares in a subsidiary is not in itself an economic activity for VAT purposes and, without an economic activity, the SPV is not making taxable supplies and is unable to recover VAT. There are ways of maximising the chances of an SPV recovering VAT but if a corporate finance house can be classed as an intermediary and therefore make VAT exempt supplies, it is one less VAT charge for the SPV to worry about.
If you have any queries about this VAT exemption and how it could apply to you, please don’t hesitate to contact a member of the Squire Sanders Tax Strategy & Benefits team.
