Dealmaking VAT reclaim black hole costing businesses millions

Scotland’s £7.3bn dealmaking sector could be missing out on around £10m of VAT rebates every year for costs such as professional fees that are not being reclaimed.

That’s according to data taken from the recent Experian MarketiQ M&A Review.

M&A VAT costs that can qualify for reclaims include professional fees relating to acquisitions within taxable businesses, and certain sell-side costs relating to disposals.

VAT reclaim rules can vary according to the corporate and share structures of the businesses involved – for example whether they are subsidiaries or employee-owned – and the rate of the qualifying claim can be either in full or in part.

Our research found that the UK’s annual £200bn M&A industry generates around £7.8bn in professional fees and £1.5bn of VAT on the fees.

Based on an average of 10% of all deals failing to recover VAT on reclaimable costs, we calculate that Scottish businesses are losing around £10m of recoverable VAT every year, and UK businesses around £150m.

Dealmaking in the UK is highly complex and subject to extensive due diligence, regulatory controls and detailed scrutiny by HMRC, so it is unsurprising that VAT reclaims on professional fees and other less obvious qualifying costs can sometimes be overlooked, particularly when the focus is securing the deal often against a tight timetable.

We would encourage both buyers and sellers to prepare a detailed VAT plan so that qualifying VAT costs are claimed in full.

Recovering VAT can be critical to cash flow, particular after an acquisition when the focus is on the integration of the new business. Exiting shareholders can equally lose focus on the fine VAT detail of the deal after the funds have transferred.

We recommend that advice is sought before the professional fees are incurred. However, even after the deal has concluded, business owners have up to four years in which to submit a claim to recover VAT on qualifying costs.

We recently helped one client recover £250,000 of qualifying VAT costs that had been overlooked, so it is always worthwhile undertaking a post-deal VAT audit.

Martin Keenan is a senior manager with Azets specialising in mergers and acquisitions VAT