Partnership shares
Customs' policy on share issues and partnership contributions following the European Court of Justice decision in KapHag Renditefonds (C-442/01) was set out in Business Brief 21/04. Customs' treatment of transactions involving the transfer of a partner's 'share' is as follows.
Partnership shares
Customs' policy on share issues and partnership contributions following the European Court of Justice decision in KapHag Renditefonds (C-442/01) was set out in Business Brief 21/04. Customs' treatment of transactions involving the transfer of a partner's 'share' is as follows.
KapHag established that a partnership entity or the existing partners are making no supply when a new partner is admitted in return for making a capital contribution. The question arises whether the subsequent disposal by the partner of that 'share' in the partnership is a supply for VAT purposes. It is important to bear in mind that this share is distinct from the assets that were contributed by the partner when he joined the partnership. Therefore, even though the selling price of the share may be determined by the value of those assets, they are not the subject of the later sale, which has its own liability for VAT purposes.
Although the European Court has not considered this type of transaction with respect to partnership shares, it has given a decision in a number of cases in respect of transactions involving shares in companies. The cases of Polysar (C-60/90), Harnas and Helm (C-C-80/95), Wellcome Trust (C-155/94) and Regie Dauphinoise (C-306/94) have established that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity. However, it has stated that transactions in shares or interests in companies and associations may constitute economic activity in three situations:
* Where the transactions constitute the direct, permanent and necessary extension of an economic activity.
* Where the transactions are effected in order to secure a direct or indirect involvement in the management of a company in which the holding is acquired.
* Where the transactions are effected as part of a commercial share-dealing activity.
Customs consider that the same principles apply to transactions involving partnership shares. This means that in some circumstances the disposal of a partnership share will not constitute a supply and in others it will.
The most common situations in which the disposal of a partnership share by a partner will not be a supply are likely to be:
* The share is disposed of for no consideration.
* The share being sold was acquired as an investment, i.e. the partner has acquired his share merely to secure a share in any future profits and has had no involvement in running the partnership.
Circumstances in which the disposal of a partnership share will constitute a supply are likely to be:
* where the partnership share was acquired and disposed of as a direct extension of the partner's economic activities, e.g. the partner may have a business asset to be sold and, rather than selling the asset directly, may have contributed that asset into a partnership and sold the resultant partnership share instead;
* where the partnership share was acquired in order to obtain an active role in the business of the partnership;
* where the partnership share was acquired as part of a commercial partnership share-dealing activity.
Supplies of partnership shares in the above circumstances cannot be disregarded by virtue of VAT Act 1994, s 45(1). As Business Brief 21/04 explained, the purpose of s 45(1) is to ensure continuity by providing that changes in the composition of a partnership do not create the need for a partnership to deregister and re-register for VAT every time the partners change. It also makes it unnecessary to take account of any changes in the composition of the partnership when determining what supplies have been made or received by the partnership business. The section has no effect upon any supply that one of the partners may be making as a taxable person in his own right.
In circumstances where the disposal of a partnership share is a supply, that supply will be an exempt financial service.
Where the disposal of an existing partnership share is not a supply, the VAT incurred in connection with the disposal will normally not be input tax. Where the disposal is a supply, the related VAT will be input tax, but recovery will normally be fully restricted under the partial exemption rules as the supply is exempt.
(Customs Business Brief 30/2004 dated 22 November 2004.)
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