PE79400 - Guidance for specific trade sectors: Private equity and venture capital: VAT Deduction implications

PEHs will normally be partly exempt, and you should follow guidance in the remainder of this manual when considering whether a PEH’s partial exemption method leads to a fair and reasonable attribution of input tax to taxable supplies.

A key point here is that, if taxed inputs are used or to be used for longer term intended activities, such as the eventual disposal ofshares on the exit of the investment which is not a supply for VAT purposes, we would expect appropriate non deduction of input tax. If incurred input tax relates to business and non-business supplies an attribution and apportionment needs to be carried out at the time of supply of the taxed inputs, which may occur a significant time period before the actual share disposal.

A PEH may make an investment, possibly as a limited partner, in another PEH where the latter, separate, entity, itself holds and disposes of the respective shares in the ultimate investee companies. (See the reference to ‘fund of funds’ in the glossary.) In this situation the PEH concerned is merely in receipt of a profit share or dividend from the other investment business entity. This activity is non-business for VAT purposes.

In the course of a Private Finance Initiative investment a PEH may invest in a project management company with the clear intention of making a profit through the receipt of dividends from it rather than realising a capital gain through the ultimate disposal of the respective shareholding. The shareholding may be held for a substantial number of years in such an arrangement. Such shares are not acquired with the intention of making an exempt (or ‘taxable’) supply and so their long-term retention is non-business for VAT purposes.

Further information on business/non-business can be found in the VAT Business/Non-Business Manual.

There may also be structures under which the PEH owns shares in an overseas holding company (e.g. in Luxembourg) and the overseas holding company in turn owns overseas subsidiary companies which hold the assets (these could be shares in investee companies or commercial properties - usually a separate overseas subsidiary company is set up to hold each asset). Such companies (and their activities) are not eligible to be included in the PEH’s VAT group. In such cases income may be received by the VAT group through dividends (outside the scope of VAT), repayment of interest free loans (outside the scope of VAT) or through interest bearing loans (exempt).