When it’s time to complete your VAT return, early preparation on your deal fees will save you pain and potentially costly penalties later.
HMRC (just like its predecessor HM Customs and Excise) has always considered ‘deal fees’ to be an area where it can challenge taxpayers. For example, it can block or claw back refunds of input VAT incurred on legal and professional fees relating to an M&A transaction.
In order to minimise your risk of a challenge relating to deal fees, do not ‘do-it-yourself’. HMRC is likely to question your input VAT recovery request when you file a VAT return that shows a significant VAT refund on your deal fees. Or it may do so at a later date when it carries out a review of your past four years’ VAT return forms.
Thankfully, there is a wealth of VAT case law that gives specialist VAT advisers a road map to guide you on the recovery of the VAT incurred on your deal fees. But this body of case law is constantly evolving. So, it’s dangerous to rely on what you heard from a VAT advisor several years ago, because that advice is probably now out-of-date.
Early action is always better before your deal completes. Get suppliers to credit incorrect VAT charges from their invoices before you pay them, rather than months afterwards. HMRC sets out detailed guidance on its website. So there is little excuse to get it wrong (from HMRC’s point of view). Your punishment could be a penalty charge of up to 30% of the VAT bill it sends you, and an interest charge (currently 7.75% annually) on top.
What do VAT advisors say?
Check whether suppliers are correctly charging VAT. Sometimes their supplies are VAT-exempt financial intermediary services (typically provided by corporate finance advisors). Alternatively, they may be made to non-UK recipients or to UK companies with no UK-fixed establishment (for VAT purposes) and so do not fall within the scope of UK VAT.
Where VAT is correctly charged, check whether the right documents are in place. Sometimes supplier invoices do not qualify as ‘proper VAT invoices’ as defined in VAT law and as set out on HMRC’s website. Or it may be that their invoices are addressed to a company that is not named as a recipient in the legal contract for their services.
If the recipient is already registered for VAT, check whether it is eligible (under VAT law) to recover input VAT incurred on its expenditure from HMRC (not just the deal fees but other costs too). If the recipient company normally makes VAT-able supplies, then its recovery of input VAT on the deal fees should generally be accepted by HMRC (subject to the points above). The difficulty arises when HMRC considers the recipient to be a ‘non-trading holding company’.
If the recipient is a non-trading holding company that only grants interest-free loans to subsidiaries and/or receives share dividends from them, check HMRC’s website where it sets out how such a company can become eligible to recover VAT on deal fees, such as (i) granting interest-bearing loans to non-UK subsidiaries or to UK subsidiaries that are members of the same UK VAT group registration as the holding company and / or (ii) supplying management services to subsidiaries.
What should you do next?
So our advice is to consult a specialist VAT advisor to guide you on input VAT recovery on your deal fees as soon as you can. Heading off issues before they arise is much better than trying to take corrective action months or years after your deal completes. It may be too late and HMRC could land you with a significant bill for VAT, interest and even a penalty.
For more information on any issues raised in this article, please contact Mark Ellis.