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New EC rules on VAT will cost UK IT firms thousands

A European Commission rule on VAT could cost UK technology companies hundreds of thousands of pounds if implemented.

Most AIM-listed technology companies will be affected as they have the classic group structure of a pure holding company that sits above various subsidiaries.

These companies typically group the holding companies with the subsidiaries, which enables them to recover VAT on fund-raising activities by the holding company.

But the new EC ruling will outlaw this type of grouping, which means any VAT incurred by a pure holding company will be an additional cost.

"These are chunky sums of money," said Niki Dixon, partner at business advisory firm Grant Thornton.

If a holding company were to raise capital of £5m, the advisors' fees would be around £500,000, which means a sum of £100,000 in VAT, she said.

"This will increase the real cost of raising money at a time when every penny counts," said Dixon.

Technology companies should be aware of the changes and change their structures to avoid incurring these additional costs, she said.

One option is to put activity into the holding companies such as managing the subsidiaries so they can reclaim VAT in their own right.

The EC has given the UK, among others, until 20 January 2010 to implement the ruling or face the Court of Justice of the European Communities.

UK authorities are unlikely to ignore the EC ruling, particularly as it will boost revenues and the finger of blame can be pointed at the EC, said Dixon.

Technology companies that fail to restructure in time will be "sleep walking" into problems, she said.


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