Recently, we have been asked to consider an often overlooked VAT exposure, namely, the potential taxable supplies involved in low or nil cost intra-group financing and security transactions.
Everyday intra-group financing arrangements such as, for example, provision of interest free loans, and the provision of intra-group guarantees, suretyships and/or subordination agreements, may constitute the supply of taxable services for VAT purposes, even if for no or low consideration.
These services may be deemed to be supplied for market value consideration in terms of section 10(4) of the VAT Act if:
- the supplier and the recipient are “connected persons” in relation to one another; and
- the recipient would not have been entitled to a full input tax credit in respect of the supply, had a market value consideration been charged (which is very often the case).
Careful, detailed analysis is required to determine the correct VAT treatment of affected intra-group financing transactions, having regard to the specific facts and profiles of the parties involved, in order to identify and mitigate potential leakage. This is an area which has thus far received surprisingly little and attention and guidance, and is an important area for consideration both in relation to existing, and future group finance arrangements.
