VQOTW: Input Tax & Raising Share Capital

My client has a new limited company, an R&D start-up. He designed a range of new kitchen utensils which the company has now obtained a patent for. The company has no credit history and is unable to secure a loan for future manufacturing costs; therefore, it has been advised to issue new shares to raise capital. With the business still in its infancy, it is unlikely to generate sales until next year. Would the company be able to recover input tax on investment advice and listing fees incurred if it was to vat register today?

My understanding is that they will be making exempt supplies of shares so are unable to recover the input tax on raising funds.

The sale of shares which are already in existence is an exempt supply and the subsequent input tax would, in principle, be irrecoverable. However, the issue of new shares to raise capital 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 decided the issue of new shares was not a supply and that they could still recover the associated input tax as long as they made taxable supplies, see VATSC11600.

Irrespective of where the client’s customers will be, UK sales will attract 20% VAT whilst overseas sales will be zero rated exports, subject to retaining shipping documentation. All standard, reduced and zero-rated supplies are classified as taxable supplies.

Your client will be able to recover input tax on investment advice and listing fees. The company will need to register voluntarily for VAT as an intending trader by completing Form VAT1.  As the company has not yet made taxable supplies, it will need to satisfy HMRC of its intention to make taxable supplies in the future, and if the 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.

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VAT Advisor
0844 892 2470

Priyesh has worked as a VAT Compliance Officer for HMRC since 2013 prior to joining Croner Taxwise. He initially worked in Small and Medium Enterprises before moving on to Wealthy & Midsize Businesses in 2014 where he gained a broad understanding of VAT and trained new VAT entrants.

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