Q:
Hello, I have a question on VAT-exempt supplies.
In recent months, I have been working on an M&A project, assisting a company to sell 100% of its share to an overseas buyer.
The project has been completed as a subcontract to an M&A advisor.
The advisor has been billing a retainer fee and has a ‘fixed’ success fee due on completion.
I have a similar arrangement on my subcontract- so have been billing the days worked at a discounted rate (adding VAT) and am due to invoice a ‘bonus’ based on the days worked now that the sale has gone through.
The advisor is invoicing their success fee as VAT exempt, because (they inform me) they are acting as an intermediary to a financial services transaction. I have read the associated clause [Notice 701/49 Aug 2006 – clause 9.1] – and this seems reasonable because in my opinion a. they are standing between the parties to a contract and acting on an intermediary basis, and b. they have undertaken work preparatory to the completion of the contract. The transaction (sale of shares) also seems to be covered.
The question they have posed to me is whether or not I should be invoicing them VAT on my ‘bonus’. My default had been to treat this as an taxable supply, but on consideration, I have effectively been running their project and so it seems logical that the VAT exemption should cover my invoices to them as well. [To be frank, it hardly seems to matter as they will reclaim it in any case, of course]
It would be very helpful if anyone on the forum could shed any light on this, and in particular:
i. does the fact I am subcontracting and not party to the sale contract matter. Effectively I am invoicing time and materials to the advisor on a discounted basis and the success fee is 50% catching up and 50% genuine completion bonus.
ii. the project as delivered has actually covered a number of stages:
a. preparing all the initial ‘marketing materials’
b. preparing buyer lists and finding the buyer, including supporting initial meetings
c. negotiating with interested parties (including the eventual buyer of course)
d. supporting the final sale preparation (eg. final contract negotiation)
It feels like stage d. is the bit that could be appropriate for being VAT exempt. Stage d. is maybe 1/3 of the total days, but 2/3 of the total ‘value added’ in the deal. If it turns out that I am supplying a mix of supplies, how do I go about calculating this (based on days or value).
iii. working on the assumption that some or all of the success fee should be treated as exempt, this will leave me invoicing a large fee with no VAT and reporting this in due course. My VAT registration is marked as a management consultancy (not an M&A or financial services advisor)
– this has me nervous that even if completely legitimate it will stand out for review. Is there any way to reference this with the authorities? There is no box on the VAT form, for example, to make a note of unusual circumstances.
Any help would be very much appreciated!
Regards
Phil
A:
Hi Phil
What a minefield you have got yourself into! This is one of those areas of VAT that is very complex and there is quite a lot of caselaw about the subject, so the VAT Notice only really covers the main issues. Hopefully my comment will help you find the right answer.
There is some additional guidance on the HMRC website about the VAT liability of financial services here http://www.hmrc.gov.uk/manuals/vatfinmanual/VATFIN7200.htm, which gives more detailed guidance than you will find in teh notice. I’d suggest that you have a look at this as it sets out HMRC view on whether someone is acting as an intermediary.
The guidance includes a flowchart to be read in conjunction with the notes but the very first point on the flowchart asks “Is the business/person bringing together someone seeking a financial service with someone providing a financial service?”. If the answer is no, then the flowchart states that the business is not acting as an intermediary. Therefore if a supplier has been working as a subcontractor for the M & A advisor this would prevent their services from being regarded as those of an intermediary and their services should be taxable.
However the position is not black and white as the guidance also explains that it is not always necessary for a business/person to contract with either party to the transaction for their services to be exempt. You mention that you have been involved in the negotiating process so this may enable your services to qualify as “intermediary” services even though you are subcontracted to the main M & A supplier.
I hope this helps you to confirm the position and if you decide that the liability is correctly standard rated, you can refer the M & A advisor to the guidance to verify the point.
Marie