IT firms under VAT threat

Tech companies urged to move fast as EC directive targets holding companies

UK technology firms have been urged to act swiftly as European Commission (EC) VAT directives are set to hit them in the pocket.

The EC wants the UK to amend legislation allowing non-trading holding companies
to be part of a VAT group registration. Such companies can recover VAT
costs associated with garnering investment, such as advisers’ expenses.

The ‘formal request’ issued by the EC on 20 November is the second stage of infringement proceedings, and failure to adhere within two months could land the UK in court.

Under current law, a firm spending £200,000 on advisory services while drumming up funding can recover £35,000. Niki Dixon, head of technology at auditor Grant Thornton, claimed the proposed legislative changes could hit tech businesses particularly hard.

“A lot of technology companies rely on venture capital funding,” she said.

“Having a holding company at the top is common. Raising money is hard enough (without) jumping through hoops for the taxman.”

Dixon claimed many companies were not up to speed with the impending changes and indicated her firm was trying to raise awareness.

She said firms needed to ensure there was some business activity in their holding companies.

Bob Tarzey, service director for analyst Quocirca, agreed accessing funding has been problematic for tech firms.

“It has clearly been getting harder and funding has dried up,” he said.

But he said most smaller channel firms’ main concern was not drumming up venture capital investment. “Channel organisations will turn to the banks and it has been much harder for them to get hold of money.”