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European Court VAT judgement hits share issues

Tax experts at accountants PKF have warned that a decision by the European Court could see companies lose millions of pounds in VAT when they raise money through share issues.

Precedence has been set by the European Court telling German tax authorities they were right to deny investment company Securenta its VAT reclaim of around £2.5 million. Part of this 1994 claim was incurred when raising capital by issuing shares amongst other things.

PKF VAT Partner Gerry Myton said, "The Securenta decision may prove very expensive for some quoted companies. It is a complex area but some quoted companies which have issued shares or do so in the future may have very substantial irrecoverable VAT on their costs running into millions of pounds. We expect companies most likely to suffer significant VAT costs will be investment companies, like Securenta, and holding companies with trading subsidiaries outside the UK."

"At a time when the level of new issues and fund raisings has dipped with the anticipated economic downturn, this is simply a further piece of bad news that the markets didn't need."

The case revolved around whether an investment company could recover all of the VAT incurred on the raising of capital including the issue of shares. Holding companies incur significant costs for legal, compliance, marketing and accountancy services when they issue new shares. Previous court decisions indicated they could fully recover the VAT on these costs.

The judgment against Securenta means that certain holding companies may only be able to recover a small percentage of any of the VAT incurred when they issue shares. HMRC may also seek to recover VAT, and interest and penalties, from such companies which have reclaimed the tax on share issues in the past three years.

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