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HMRC internal manual

VAT Partial Exemption Guidance

Guidance for specific trade sectors: corporate finance activities

Corporate Finance: Partial Exemption (PE) Issues

The purpose of this document is to provide some guidance on a number of matters to be considered when developing an appropriate partial exemption method in relation to “Corporate Finance”.

Corporate finance activities are generally carried out by investment banks as well as by smaller specialist corporate finance boutiques.

Consideration may be given to the use of the special method where the standard method does not produce a fair and reasonable recovery of input tax.

In investment banks, corporate finance services will normally constitute a distinct area or department of the business and are usually treated as a separate sector or sub-sector in a sectorised partial exemption special method. For the smaller specialist corporate finance boutiques, a single pot partial exemption special method may be appropriate.

As with all businesses there are variations in the range and mix of services offered by different investment banks. It is important to understand the type of services provided by the bank and to take an overall view to ensure that the method adopted will give a fair and reasonable recovery of input tax.


The services provided by Corporate Finance provider/advisor will vary depending upon the client/engagement. The services may include (but will not be limited to):

  • General financial advice;
  • Assistance in and arrangement of Capital raising (e.g. by initial public offerings (IPOs) or through other types of share and bond issues);
  • Mergers and Acquisitions services, including:

management buyouts and
acquiring or disposing of companies through share sales generally, and
acquiring or disposing of undertakings (or parts of undertakings) through asset sales;
advice to prevent a take-over.

Guidance on the liability of corporate finance services can be found in VATFIN manual and within VAT Notice 701/49 Finance.


The fees arising in this area will vary by type of transaction and also potentially by supplier. Considering the types of services detailed at Section 1) above, it is possible the calculation and frequency of fees may vary significantly. For example the fees in each type of service may include (but will not be limited to):

  • General Financial Advice

One-off fee for a specific project;
Periodic fees for a specific project (monthly, quarterly, 6 monthly);
Retainer fees over a period of time for general advice on a number of different matters;
Corporate broking fees

  • Capital Raising

Success fee for completion of a specific capital raising project;
Periodic fees during the life of a project (monthly, quarterly, 6 monthly);
Success fees for re-negotiation of existing facilities;

  • Mergers and Acquisitions

Retainer fees during a project (monthly, quarterly, 6 monthly);
Success fees (note, if a retainer fee has been charged during a project it is possible the success fee will take account of these retainer fees already charged);
Agreed project fees, not dependent upon success/arrangement of a transaction

Fees, particularly for Capital Raising and Mergers and Acquisitions activity, are frequently based on the value of the transaction, not the ‘cost’ of carrying it out. Although time is often recorded in a timesheet system, it is unlikely that fees will be calculated using the timesheets as a basis.

You should also be aware that many corporate finance providers will have establishments/associated entities in a number of different countries, and it may be necessary to consider any “inter-company” transactions when looking at the revenues being generated by the taxpayer.

Partial exemption apportionment proxies

Many of the outsourced professional fees incurred by the corporate financier will be directly attributable to a specific taxable or exempt supply and will, therefore, be fully recoverable or fully non-recoverable respectively.

Any proposals for a method of residual input tax recovery in respect of corporate finance activities have to be to be examined on their own merits. There are no fixed conclusions that can be reached in developing a residual input tax recovery methodology for corporate finance activities. Appropriate methods will be dependent upon a number of factors including the structure of the taxpayer, the types of transactions they undertake, the manner/frequency in which they invoice and the values of the transactions undertaken. The two main types of methodologies we see in this area are outputs value and transaction count.

Both outputs value and transaction count calculations should clearly define what supplies are to be included and what supplies are to be excluded.

With smaller businesses there may be periods in which no fees are raised. Provisional use of previous year’s recovery rates may be acceptable where there is no activity in some VAT periods during the subsequent tax year.

Detailed below are some points to consider in the outputs value and transaction count approaches, although this will not be a complete list of points to be considered.

Outputs Value

This is the most common apportionment proxy agreed for corporate finance. An approach based on outputs values should be reasonably simple to calculate but there are a number of matters to consider. For example:

  • Large value fees may have the potential to distort the calculation and the possibility of capping the value of large success fees may need to be considered in some cases. However, the use of such a cap may not be appropriate for all taxpayers, and would be dependent upon the level of fees generated and whether such fees are outside of the “norm” and would result in an input tax recovery which is not fair and reasonable;
  • How will credit notes be treated? They should be included, but what happens if the credit note is issued in a different VAT year to the original invoice?
  • Should the value of expenses be included in the values calculation?
  • How are inter-company transactions included in the value calculation?
  • It will be necessary to agree the basis of the calculation. For example, will the calculations be based on invoiced values and dates, received payments, accruals, other?

Transaction Count

A transaction based method may be proposed but this method of apportionment has potential pitfalls which may prevent it from producing a fair and reasonable result.

For example, a £1m transaction may have involved far more work (i.e. more use of residual input tax) than a £1000 transaction and, therefore, it might not be fair and reasonable for each transaction to be given the same weighting in the transaction count. It might be possible to exclude low value transactions from a transaction count to prevent such a distortion arising.

Other supplies incurring little residual input tax which might distort a transaction count calculation and might need to be excluded are recharge of expenses only invoices and retainer fees unless substantial work is done in respect of the retainers.

This does not mean that such methods will be refused without proper consideration of their merits. It is necessary to consider how the methodology will operate, as is also the case with an outputs based calculation.

  • What counts as a transaction? Is it an invoice? Or is it based on number of engagements in place? Normally such a method will be based upon invoices, but be aware that this is not the only approach which can be considered in a transaction count;
  • How will credit notes be included?
  • Will “expense only” invoices/credit notes be included?
  • How are transactions with associated entities (inter-company) considered? It is possible there may be a different invoicing approach with inter-company transactions, so there may be a need to operate a hybrid method of some kind

However it should be stressed that alternative methods should also be considered as for some taxpayers a methodology based upon outputs or transaction count may not be appropriate.