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HMRC internal manual

VAT Finance Manual

Securities and related services: underwriting services

An underwriting service is an arrangement by which a company is guaranteed that an issue of securities will raise a given amount of cash. This guarantee is provided, for a commission, by an underwriter who undertakes to apply for, or to find other applicants for all or part of an issue which is not otherwise taken up.

An issue of securities is under subscribed when applications total less than the amount offered for sale or subscription. If the issue is underwritten, the underwriters have to take up the amount not subscribed on a pro rata basis to their commitments. In such cases it is not unusual for dealings in the security to begin at a ‘Discount’ on the issue price.

It is common for underwriters to spread their risk by passing some, or all of their commitment, to sub-underwriters who share in the underwriting commission.

How the exemption applies

Where a fee is charged for a service, which guarantees that:

  • a securities issue or sale will be subscribed for or purchased and
  • the issuer shall receive a certain amount of capital

that underwriting service is exempt under item 5A of Group 5

This point was confirmed by the ECJ in Skandinaviska Enskilda Banken AB Momosgrupp (Case C-540/09) which ruled that an underwriting guarantee was exempt as a transaction in shares. This is regardless of whether the share issue was ultimately entirely covered by market investors; as the underwriting agreement is liable to create, alter or extinguish rights in ownership of shares, this possibility alone is sufficient to treat the underwriting service as exempt.

Consideration in non-monetary forms

Where the charge for underwriting services is adjusted to reflect the entitlement to purchase (at a special price) a number of securities on offer, the value of the special price must be regarded as part of the consideration for the exempt supply of underwriting services. The supply by the issuer of the right to acquire the securities at a special price is exempt under item 6.

However an underwriter may be obliged to buy the securities which remain unsold. The underwriting agreement may allow the underwriter to buy these unsold securities at a price lower than the offer price. This reduction is not regarded as consideration for the underwriting service - it is outside the scope of VAT.

Sub underwriters

The services of sub-underwriters who agree to underwrite a proportion of the issue or sale are also exempt under item 5A of Group 5, Schedule 9 of the VAT Act 1994.

Determining the place of supply for sub-underwriters

If a sale or issue involved a lead underwriter in one country and the securities issuer or vendor in another, it will be necessary to determine whether a sub-underwriter’s services are supplied to the lead underwriter or the vendor. The place of supply of the sub-underwriting service will depend on the contract.