VAT and Private Equity Funds

Transcription

1 VAT and Private Equity Funds Jenny Wheater August Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm and Affiliate Offices New York London Singapore Philadelphia Chicago Washington, D.C. San Francisco Silicon Valley San Diego Boston Houston Los Angeles Hanoi Ho Chi Minh City Atlanta Baltimore Wilmington Miami Boca Raton Pittsburgh Newark Las Vegas Cherry Hill Lake Tahoe Myanmar Oman Mexico City Duane Morris LLP A Delaware limited liability partnership

2 Introduction This presentation gives an overview of VAT concepts for those unfamiliar with the tax and then looks at common VAT issues with funds. Note that VAT is a complicated and counter-intuitive tax frequently there is no right or wrong answer and a position needs to be taken. In many places this presentation will make sweeping statements for the sake of simplicity which will not necessarily apply in all cases. 1

3 Background VAT is a tax imposed on the provision of goods and services. Nearest US equivalent sales tax. European tax VAT Directive implemented into each country s law occasional mismatches. VAT applies in Isle of Man, but not in Channel Islands (e.g., Jersey, Guernsey). Applies to goods and services focus of this talk on services since those apply most to funds. Talk focuses on the UK but remember that the same principles are likely to apply to other EU countries. 2

4 VAT rates and scope UK VAT standard rate currently 20%; lower rate applicable to some supplies is 5%; some supplies are zero rated so the rate is 0%; other EU countries may have different rates the minimum is 15% but rates currently go up to 27%. Whether and at what rate VAT is charged depends upon the place of supply of the goods or services in question. In relation to goods (less of an issue in relation to funds) complex rules determine the place of supply. In relation to services, VAT will be charged based on the place of belonging of either the customer or the supplier. 3

5 VAT place of supply Generally, business to business services are supplied where the customer belongs and business to consumer services are supplied where the supplier belongs. Some exceptions, e.g., legal services to individual consumer outside the EU. Since VAT is a EU tax, EU businesses may have to account for VAT on supplies made to them under the reverse charge mechanism where supplies are treated as self-supplies. 4

6 VAT summary of business to business supplies UK supplier supplies service to UK business place of supply where customer belongs UK VAT on invoice. UK supplier supplies service to non-eu business place of supply where customer belongs no UK VAT on invoice, no EU VAT at all; outside the scope of VAT. UK supplier supplies service to business in another EU Member State place of supply where customer belongs no UK VAT on invoice, BUT normally VAT to be charged in the EU Member State where customer belongs under the reverse charge mechanism. EU (but non-uk) or non-eu supplier supplies service to UK business place of supply where customer belongs no VAT on invoice (even if EU supplier) BUT reverse charge UK VAT. 5

7 VAT recovery Idea with VAT recovery is that the ultimate consumer of the supplies is the one who bears the VAT. Expectation is that individuals will bear VAT on goods and services they purchase but suppliers of goods and services upon which VAT is chargeable should be able to recover VAT incurred in the making of these supplies. Thus VAT is payable on the value added at each stage. Complexities with different types of supplies not addressed here. 6

8 VAT recovery basic concept Tax on value added at each stage in supply chain goods and services Simple example: End product manufacturer Retailer Component manufacturer End consumer 7

9 Input VAT, output VAT, amount paid to HMRC and input VAT recovery Input VAT VAT incurred by a VAT registered person on supplies made to him. Output VAT VAT received by a VAT registered person on supplies made by him. Basic principle: VAT registered person should be able to recover input VAT incurred if it is recoverable VAT; irrecoverable VAT represents a genuine cost to a business. 8 Output VAT x Less: Input VAT (if recoverable) ( x) Amount paid to HMRC x

10 VAT recovery VAT is typically recoverable when incurred by a business making taxable supplies. VAT is irrecoverable when incurred by a business not making taxable supplies. Important point to note supplies which are zero rated or (in most cases) outside the scope of VAT are still taxable supplies. Exempt supplies are not taxable supplies. Thus when we talk about supplies which are outside the scope of VAT or zero rated for VAT the RECOVERY position is very different to supplies which are exempt from VAT even though no amount of VAT will be charged on all three types of supply. Important frequent references to no VAT are incomplete! 9

11 VAT recovery simple examples A Limited incurs 100 of input VAT on supplies incurred in the course of its business supplying widgets to customers in the UK. The supply of widgets is taxable at standard rate. A Limited can recover the 100 input VAT. B Limited incurs 100 of input VAT on supplies incurred in the course of its business supplying wodgets in the UK. The supply of wodgets is zero rated. B Limited can recover the 100 input VAT because the supply of wodgets is still a taxable supply the rate just happens to be zero. 10

12 VAT recovery simple examples C Limited incurs 100 of input VAT on supplies incurred in the course of supplying a wadget-repair service to businesses located outside the EU. The supply of repairing wadgets is taxable at the standard rate but C Limited does not charge VAT because its customers are outside the EU. C Limited can recover the 100 input tax because it is still making taxable supplies there is just no VAT chargeable because of the location of its customers. D Limited incurs 100 of input VAT on supplies incurred in the course of its business supplying wudgets in the UK. The supply of wudgets is exempt from VAT. D Limited cannot recover the 100 input tax because it does not make taxable supplies but exempt supplies. 11

13 VAT recovery procedure To recover VAT it must be reclaimed on a taxpayer s VAT return (usually quarterly). This can lead to cash flow issues if VAT has been charged and needs to then be recovered. 12

14 VAT & funds general VAT can be complicated with funds and every situation needs to be considered separately. VAT also impacts the billing of clients (including fund clients) by the London office. 13

15 VAT and funds general You will have to consider VAT issues in fund structures involving the UK or another EU country. Often complex structures with funds are based on VAT issues and several points need to be considered. A key point is that, under VAT case law, a limited partnership acts through its general partner. Thus, the GP registers for VAT and supplies to the partnership are made where the ultimate GP company (e.g., GP of the GPLP) belongs for VAT purposes 14

16 VAT and funds where does VAT arise? VAT issues will typically arise on management and advisory fees in the structure. Thus, in a typical scenario, the GP of a fund receives a profit share which is then used to pay the management fee. A partnership profit share is not a supply for VAT purposes. However, the management fee is payment for a supply of services - thus, there are potential VAT issues. It is also important to note that the GP will not make taxable supplies. Supplies of financial services are exempt supplies thus, as shown above, VAT is not recoverable. 15

17 VAT in practice funds Services UK GP profit share (no VAT) Fees Manager Co UK VAT due on a supply of services between businesses where the customer belongs in the U.K. English Fund LP Portfolio companies 16

18 VAT and funds grouping Bodies corporate can form a VAT group. Supplies between members of a group are ignored for VAT purposes There are requirements for eligibility to form a group must be related parties, where one controls the other or both are under common control. Must apply for group treatment not automatic. Foreign entities need a fixed establishment in the UK to be a member of a VAT group. In a fund context, a UK manager and GP can be VAT grouped which addresses the VAT on management fees. 17

19 VAT in practice grouping Services UK Manager Fees no VAT because intra-group VAT group UK GP profit share (no VAT) Investors English Fund LP Portfolio companies 18

20 VAT in practice grouping However, grouping does not work in all cases. Examples: Overseas advisory or management fees from related entities; these would be received from overseas advisers who are not part of the group; thus UK VAT would be incurred by the GP and this could not be recovered. Extensive advisory fees from others e.g. lawyers, accountants; again, subject to VAT and not recoverable. 19

21 VAT in practice offshore GP An offshore GP company provides an alternative solution. If services are supplied to a non-eu GP then they will be outside the scope of VAT. This means that no VAT will be due. 20

22 VAT in practice offshore GP UK Manager Offshore GP German Adviser profit share (no VAT) Fees no VAT because customer outside the scope US Adviser Fund LP 21

23 VAT in practice issues with offshore structure Care needs to be taken to ensure that the costs of the offshore structure do not outweigh its benefits. Operation of structure means GP must truly belong offshore; this test is more stringent than establishment or residence. Will require actual activity in the offshore jurisdiction to demonstrate benefit from the supplies. 22

24 VAT in practice issues with offshore structure The documents governing the flow of funds also need some care in a fund structure for VAT (and regulatory reasons). Importantly, the management services must be supplied to the GP and not to the fund and the GP must fund payment from a profit share. If services are supplied to the fund then the payment will be by the fund for a supply of services and thus subject to VAT. There are also direct tax issues for UK taxpaying investors/carryholders if the services are supplied to the fund. 23

25 VAT in practice issues with offshore structure For regulatory reasons, the GP must be required in the partnership documents to procure the management of the fund and not manage it themselves nor delegate the activity. This again makes it important that the services are supplied to the GP. Manager, not GP, is the FCA authorised entity. GP cannot carry on FCA authorised activities. 24

26 VAT in practice offshore structure and bills Legal fees (including those of DM!) for a fund establishment are usually billed at a late stage in the process of formation at a point by which an offshore GP will be established if this structure is being used, even if there is an onshore (e.g. UK) manager. Should the bill then be sent to the GP and thus be automatically outside the scope of VAT? NO some apportionment must be made; early costs need to be billed to the manager; they can generally on-charge this and recover the VAT and we can explain this if need be. GP cannot be billed for services rendered before it was even set up! Need to take robust stance on this some clients push for GP to be billed for everything but this is incorrect. 25

27 Further information Jenny Wheater, Partner, London +44(0)

28 VAT and Private Equity Funds Jenny Wheater August Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm and Affiliate Offices New York London Singapore Philadelphia Chicago Washington, D.C. San Francisco Silicon Valley San Diego Boston Houston Los Angeles Hanoi Ho Chi Minh City Atlanta Baltimore Wilmington Miami Boca Raton Pittsburgh Newark Las Vegas Cherry Hill Lake Tahoe Myanmar Oman Mexico City Duane Morris LLP A Delaware limited liability partnership