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The largest FTSE 100 holding companies that issue new shares could be exposed to VAT costs in excess of £1 million.

This would be the case if the European Court upholds an opinion given by the Advocate General in the German Securenta case, according to VAT experts at PKF accountants and business advisers.

The case revolves around whether a company carrying on both business and non-business activities can recover all of the VAT incurred on the issue of shares.

Holding companies incur significant costs for legal, compliance, marketing and accountancy services when they issue new shares but, since the Kretztechnik case in the ECJ in 2005, many are likely to have assumed they could fully recover the VAT on these costs.

Repay substantial sums 

The opinion against German public company Securenta means that holding companies, which in the main carry out investment rather than business activities, would  only be able to recover a small  percentage of any of the VAT incurred when they issue shares. 

Companies that have reclaimed the tax in the past three years may have to repay substantial sums plus penalties and interest to HM Revenue and Customs if the opinion is upheld when it comes before the ECJ in the New Year.

PKF VAT Partner Gerry Myton says that the Securenta case could prove very expensive for quoted companies if, as he expect, the ECJ upholds this opinion.

“It is a complex area and there may be more legal twists to come but if this opinion is upheld, quoted companies which have issued shares or do so in the future will have very substantial irrecoverable VAT on their costs,” Myton adds.

He adds that that could be a VAT bill of more than £1million for large share issues in the biggest holding companies.

“It would be simply rubbing salt in the wound if HMRC added penalties and interest for the sums reclaimed in the last three years but that too is more than possible,” Myton concludes.

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Related links

• PKF