EC VAT plans to bash UK tech firms

Feeling the pinch: finding investment could be much more costly for tech companies under new EC proposals

Technology firms could be set to "sleepwalk into" a VAT quagmire as the European Commission (EC) has given the UK two months to amend group registration tax laws.

Under current UK law, non-trading holding companies are allowed to join a VAT group registration. These passive companies are able to recover VAT charges, meaning firms can avoid tax on costs such as fees for share issues.

On 20 November, the EC issued a formal request compelling the UK and six other member states to end the practice of allowing "the inclusion of non-taxable persons into a VAT group ". The UK was given two months to toe the line.

An EC statement added: "If these member states fail to comply with the reasoned opinion within two months, the Commission may refer the matter to the Court of Justice of the European Communities."

Accountancy firm Grant Thornton has warned that the proposed legislative changes will hit tech firms particularly hard. The company's head of technology Niki Dixon claimed many businesses rely on holding companies as investment vehicles to drum up funding without incurring a hefty tax bill.

"If the EC proposal is enforced, it will increase the real cost of raising money at a time when every penny counts," she said. "Businesses should consider how the change would affect their VAT recoveries and take steps now to protect their position. Those that do not will simply sleepwalk into problems."