VAT treatment of the issue of shares in a business

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • VAT treatment of the issue of shares in a business
  • VAT treatment of the issue of new shares in a business
  • Share underwriting

This guidance note provides an overview of the VAT treatment of the issue of new shares to raise capital for a business and the disposal of shares in a business. This is a complex area of VAT and most issues that arise concern whether VAT can be recovered on costs associated with issuing new shares. This note does not cover the VAT treatment of share disposals or acquisitions and this topic is covered in guidance note VAT treatment of share disposals and acquisition.

VAT treatment of the issue of new shares in a business
The Kretztechnik principles

The VAT treatment of the issue of new shares by companies seeking to raise capital for their business was clarified in a landmark case, Kretztechnik AG v Finanzamt Linz in which the ECJ ruled that Kretztechnik was not making any supply when it issued new shares in its business. However, the business was entitled to treat the VAT incurred on the costs associated with the issue of the shares as input tax. HMRC always considered that the issue of new shares was an exempt supply for VAT purposes and, therefore, the business was not entitled to recover any input VAT associated with the share issue (subject to the partial exemption de minimis limit).

Kretztechnik AG v Finanzamt Linz (Case C-465/03) [2005] STC 1118 (subscription sensitive)

However, since the Kretztechnik decision, HMRC has accepted that if the business only makes taxable supplies (ie all of the sales are liable to VAT at 0%, 5% and 20%) they are entitled to treat any VAT incurred on costs associated with the share issue as a general 'business overhead' and, as a result, all of the VAT should be recoverable in full subject to the normal rules. However, if the business only makes exempt supplies, it will not be able to

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