Often limited companies may find it difficult to raise funds, whether they be starts up, those looking to expand or even to buy new plant and equipment. Some may not have a favourable credit history and cannot secure the required loans. An option to is to issue new shares to raise capital, but how will this impact the VAT on expenses incurred during the process?
The sale of shares which are already in existence is a VAT exempt supply and the subsequent input tax would, in principle, be irrecoverable – subject to partial exemption de-minimis limits. On the other hand, the issue of new shares is not a supply for VAT purposes.
VAT Notice 701/49 section 6.1 states, ‘The issue of securities such as shares, bonds, loan notes, debentures, are not supplies for VAT purposes when the purpose of that issue is to raise capital. This includes the issue of units or shares in an investment fund.
Input tax incurred that relates to an issue of shares or other securities will be recoverable to the extent that the issuer’s business activities generate taxable supplies.’
This was also confirmed by the ECJ in the case of Kretztechnik vs Finanzamt Linz. Kretztechnik was a fully taxable company that issued new shares. The ECJ confirmed the issue of new shares was not a supply and that they could still reclaim the associated input tax on the basis they made taxable supplies, see VATSC11600.
For VAT purposes, a taxable supply is a sale which is ordinarily standard, reduced or zero rated.
A fully taxable company will be able to recover input tax on expenses such as investment advice, other professional costs and listing fees without incurring any restrictions.
For those who are not currently VAT registered they will need to register voluntarily as an intending trader by completing the online VAT1 application. They will also need to satisfy HMRC of its intention to make taxable supplies in the future. If any VAT is incurred prior to the date of registration, it will be subject to the normal six-month time limit applicable to pre-registration input tax on services.
Partially exempt businesses would likely be required to restrict VAT in relation to the issue of new shares.
If you would like more information or any advice please contact our VAT Team at Ellacotts on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query and we will get back to you.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
