Securities and related services: supply, liability, consideration
VAT treatment of the issue of securities
The issue of securities, including bonds, debentures, loan notes and shares or units in collective investment funds, where the purpose of that issue is to raise finance, is not a supply for VAT purposes.
This follows the ECJ judgment in the case of Kretztechnik AG (case C465/03 -  STC 1118). In Kreztechnic, the ECJ held that a first issue of shares by a public limited company is not a supply for VAT purposes and the VAT on any associated costs is incurred in order to increase capital for the benefit of the company’s economic activities in general. Consequently, the input tax on those costs is residual and recoverable to the extent that the company’s outputs are taxable transactions.
This treatment also applies to the issue of shares of different types, for example issues of preference shares, special rights issues, bonus issues or issues of scrip dividends. It also applies where the issue of securities is one of several transactions that take place in the context of wider arrangements, for example in order to effect a company takeover or as part of a company restructuring through merger or demerger.
Transactions involving issues by different types of limited company, for example a private limited company, will also be non-supplies for VAT purposes provided that the issuer’s motivation is, like Kretztechnik’s, the raising of capital.
VAT treatment of the sale or transfer of, or trading in existing securities
Where there is the sale or transfer of, or trading in existing securities, and this is done in the course or furtherance of a business, there is a supply for VAT purposes which is exempt.
The consideration for the sale or transfer of securities is the amount received by the seller and is exempt under item 6.
Money received for the issue of a security is not consideration for a supply if that security has been issued in order to raise finance.
The interest paid to the holder of the bond is exempt under the VAT Act 1994, Schedule 9, Group 5, item 2.
Payments received that are not consideration
Dividends paid are outside the scope of VAT as they do not represent consideration for any supply of goods or services by the holder of the security.
Dividends can be calculated in a number of ways depending on the type of company. For example:
- Limited companies - the rate of dividend is the amount of distributed profit as a percentage of the nominal value of the share capital to which it relates.
- Co-op societies - the rate of dividend is the amount of surplus (i.e. profit) to be returned to members in proportion to their purchases.
Redemption of securities
Where fixed term securities (e.g. bonds) are held until their maturity date the payment received on redemption is outside the scope, as there is no supply of goods or services by the holder.