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HMRC internal manual

VAT Finance Manual

HM Revenue & Customs
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Intermediaries: Corporate and other financial services: Types of corporate finance deals

These are examples of services provided by a corporate finance business (“CFB”), which may involve exempt supplies as an intermediary under item 5.

Clear or specific mandate agreements

The CFB’s client may choose to issue, sell or purchase securities (e.g. shares) or take out a loan. The CFB is engaged to negotiate the transaction. If the CFB meets all the criteria for exemption (bearing in mind that for transaction in securities there need be no preparatory work) and you are satisfied there is a single supply, this is an exempt intermediary service. You may find that other companies are sub-contracted for their advisory services in the sale of the securities. Unless they themselves are responsible for bringing together the parties, their supply will be taxable.

Where the agreement is aborted and the services provided would have been exempt had the transaction gone through, the services remain exempt.

Open mandates

An open mandate arises when an organisation is engaged for its specialist skills, but it is not known at the time of engagement if there will be any specific exempt transaction. For example, a merchant bank could be asked to evaluate methods of refinancing the business and eventually decide that the best way to do so is by issuing shares in the company (an exempt item 6 transaction).

The merchant bank offers advisory services under the agreement to evaluate methods of finance and these will be supplies for VAT purposes only when supplied for a consideration. These will be liable to VAT at the standard rate up until any such time as an exempt transaction is actually envisaged. This is a complex area and open to some debate because the point at which the services change from being advisory to intermediary in nature is often unclear.

If the business subsequently decides to effect a transaction that is exempt (e.g. share issue), then the intermediary’s services will be exempt except to the extent that any specific charge for the advisory element may be identified (see VATFIN7220). It is important to look at how the services are supplied: there may be a new agreement with the bank outlining a change in engagement terms (in which case the advisory services supplied under the first agreement will be liable to VAT) or an exempt transaction will be envisaged from the outset, albeit that it is not known exactly which exempt transaction (with the advisory services seen as part of this single exempt supply).

You should always check the agreements etc to confirm the terms on which the CFB or any other organisation has been engaged.

Where the agreement is aborted, the liability depends on the nature of the service supplied. Exemption is not permitted for advisory services – only where work has specifically been undertaken in relation to an exempt supply (and provided all the criteria are met). If an exempt transaction was envisaged, and you can see that the work already carried out reflects this, the fee will be exempt regardless of whether or not the contract was concluded.

Services to a target company

A company may need to defend itself against a hostile take-over bid and engage another party to help deal with this. Such services are often advisory and will be taxable. However, as with the situation above, their services may involve raising capital (perhaps by issuing shares) or arranging a de-merger or sale of a subsidiary in order to defend the take-over. It is again important to examine precisely what is being supplied and contracts will help you do this. Where such services are supplied to a company in connection with an agreed bid, these may involve only advice (liable to VAT at the standard rate). However, it could be that the adviser eventually becomes involved as an intermediary for the take-over, for example, by setting up the terms and conditions for the final deal. Provided the criteria are met, such services would fall within the exemption.