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New HMRC rules on VAT: What you can and can't claim on investment costs
HMRC has changed how VAT recovery works for investment-related costs. These updates affect how businesses can reclaim VAT on legal, consultancy, or advisory fees connected to raising capital. If your company raises funds through equity, venture capital, or crowdfunding, it's essential to understand these rules before making your next VAT claim.
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Why HMRC changed the rules
In the past, businesses often claimed VAT on fundraising or investment-related costs because they believed raising capital supported overall business growth. HMRC has now clarified that this general approach no longer applies.
Under the new policy, VAT recovery is only allowed if there’s a direct and immediate link between the cost and taxable business activities. If an expense does not contribute to VATable sales or services, it is no longer eligible for recovery.
The focus has shifted from how funds are raised to how they are used. The money you raise must support a taxable business outcome, not just general growth or financial stability. For more on recent VAT regulation updates, read our detailed article on important VAT changes UK businesses must know.
What this means for businesses
This rule change affects a wide range of UK businesses, mainly:
- Startups raising seed or Series A funding
- Established companies undergoing mergers or acquisitions
- Businesses that attract external investors
- Firms with holding structures or mixed taxable and exempt activities
If your business regularly raises funds to expand or restructure, you’ll now need more precise documentation to justify VAT recovery.
Understanding VAT on Investment Costs
Professional services and other costs incurred when raising capital for your business are covered by VAT on investment costs. This includes:
- Fees for legal counsel and share issuance or investor attraction
- Advisory fees for acquisitions or fundraising
- Restructuring-related financial services or management fees
These days, HMRC handles these expenses differently based on its goals and results.
Costs you can likely claim
You can still recover VAT on certain investment-related costs if they are directly related to a VAT-able activity. These include:
- Legal expenses incurred when issuing shares can be reclaimed if the funds raised are later spent on activities that generate VATable income.
- Advisory or consultancy costs tied to launching a taxable product or service
- Costs incurred while restructuring or reorganising VATable business operations
The deciding factor is whether the cost supports a taxable supply. You must show a clear link between the investment cost and the revenue-generating activity that attracts VAT.
Costs you likely can't claim
- Fees for legal counsel or advice when selling stock or changing ownership
- Campaigns for investor relations, branding, or public relations that try to raise money
- Fundraising initiatives that don’t have a definite VATable outcome, like equity raised only to settle debt or accumulate reserves
How to determine eligibility
HMRC uses the “direct and immediate link” test to decide whether VAT on investment costs can be reclaimed. To meet this test, businesses should be able to show:
- The cost supports a taxable business activity
- Documentation links the expense to a specific product, project, or service
- There’s no indirect or purely financial purpose for the spending
General claims such as “this funding supports growth” are no longer sufficient. You must prove that each cost was incurred for a purpose that leads to VATable sales.
Who faces the most risk
- Holding companies without direct trading activity
- Startups raising external capital for general use
- Firms involved in cross-border investments
- Groups with subsidiaries where funding is transferred internally
If you’ve previously made investment-related VAT claims, it’s worth reviewing them now. Use the following steps to stay compliant under the new rules:
- Recheck past claims: Review all allegations made on fundraising, restructuring, or advisory costs. If they can’t be tied directly to VATable business activity, you may need to adjust them.
- Maintain clear documentation: Record exactly how funds raised are used. For example, if funds supported a taxable product launch, retain invoices, contracts, and correspondence showing the link.
- Separate investment expenses: Maintain separate accounting records for costs related to funding or share issuance. Avoid grouping them with operational or administrative fees.
- Get expert advice: A VAT specialist should review complex structures involving multiple subsidiaries or cross-border activities. Professional advice helps prevent future disputes or penalties.
Can you still reclaim VAT on equity funding?
- Introducing new taxable goods or services
- Entering new businesses that are registered for VAT
- Buying supplies or machinery for VATable trading
- Paying back loans or outstanding debts
- Increasing reserves or paying dividends
- Funding tax-exempt supplies or financial services
Digital VAT compliance under MTD
With Making Tax Digital (MTD), HMRC relies more heavily on digital data analysis. This enables VAT audits to be conducted more efficiently and thoroughly. Businesses still using manual or paper-based systems risk being flagged for review if their VAT trail contains gaps.
Under MTD:
- VAT submissions must be entirely digital
- Missing or inconsistent data may trigger compliance checks
Ensure your records clearly show, and ensure you can cross-check claims with your financial activity. Ensure that your records clearly indicate how investment funds and related costs support taxable trading activities.
Why this matters for financial planning
- Understanding what qualifies for VAT recovery helps businesses manage cash flow and avoid costly errors. Incorrect claims can lead to penalties or delays in refunds.
- If your company regularly raises funds, build VAT analysis into your investment strategy. Before paying advisory or legal fees, assess whether each expense contributes to taxable business output.
- This method guarantees that, if HMRC examines your records, your VAT position will remain secure.
Final thoughts
- The new HMRC rules on VAT and investment costs are now active. Businesses can still recover VAT, but only if the expenses are directly linked to VATable trading activity. A clear record trail, accurate documentation, and structured digital filing are now essential to avoid claim denials or audits.
- VAT recovery is no longer automatic—it depends on how effectively you connect each expense to your taxable business outcomes.
Don't wait for an HMRC letter
These updates are already effective. If you’ve raised funds or plan to, now’s the time to act:
- Know precisely where the funds go
- Document their use clearly
- Use a VAT tool that aligns with current HMRC rules
Fundraising is crucial for growth. But VAT recovery now hinges on how investment costs are used. You can’t just assume a claim will pass. You must show how costs support taxable trading.
If you need help checking your VAT on investment costs, start a free trial of Swift VAT Pro or speak to our support team today
Frequently Asked Questions:
Your Questions – Answered ,We’re here to help you with anything VAT-related.
1. What are the new HMRC rules on VAT for investment costs?
HMRC has introduced new guidance clarifying when businesses can reclaim VAT on investment-related costs such as legal, advisory, or consultancy fees. Under the revised approach, VAT recovery is only allowed if there’s a direct and immediate link between the cost incurred and the company’s VATable business activity.
In simpler terms, the expense must contribute to taxable sales or services—not just general business growth or investment structuring. However, if the funds are used for financial restructuring, shareholder transactions, or non-VATable investments, VAT recovery won’t be allowed.
HMRC now looks beyond the purpose of fundraising—it examines how the money raised is actually used. Businesses, especially those with mixed or holding structures, must now maintain precise documentation to prove VAT eligibility.
2. Can I still reclaim VAT on legal or advisory fees during business acquisition?
Yes—but only under certain conditions. If your business acquisition directly supports VATable activities, you can still reclaim VAT on related legal or advisory fees. For example, if you purchase a company that will be actively trading and generating VATable income, then VAT on professional fees linked to that acquisition may be recoverable.
However, if the transaction is purely financial—such as buying shares in a holding company that does not trade or provide taxable goods or services—VAT recovery will likely be denied. HMRC now focuses on the intended outcome of the acquisition rather than just the process itself.
To protect your claim, please make sure to maintain clear documentation showing that the acquired entity contributes to taxable operations. Keep records of business plans, contracts, and post-acquisition activities to prove the connection between the professional fees paid and future VATable outputs.
3. Are holding companies still allowed to recover input VAT on expenses?
Holding companies can still reclaim VAT, but the criteria have become stricter. HMRC now requires proof that any expense incurred by the holding company is directly connected to a taxable business activity—either through management involvement or by providing VATable services to its subsidiaries.
If a holding company only holds shares and does not participate in the trading or operational side of the business, it cannot usually recover VAT on its expenses. But if it actively manages or provides chargeable services (such as administration or consultancy) to subsidiaries, VAT recovery may still be allowed.
To comply, holding companies should establish management service agreements and maintain evidence of chargeable services. HMRC now expects detailed records proving that input VAT was incurred for genuine business purposes that contribute to taxable outputs, not merely for financial or investment structuring.
4. What documentation is needed to support a VAT reclaim on investment costs?
HMRC expects businesses to maintain comprehensive documentation that clearly links incurred expenses to VATable activities. This includes:
- Invoices and contracts for legal, advisory, or consultancy services.
- Evidence showing how the funds raised were used (e.g., for purchasing taxable goods or services).
- Internal records or correspondence confirming the purpose of the transaction.
- Business plans or financial projections proving VATable intent.
The goal is to show a “direct and immediate link” between the cost and taxable outputs. Vague justifications like “supporting business growth” are no longer acceptable.
When filing your VAT return, cross-reference all documentation digitally—especially under Making Tax Digital (MTD). A clear audit trail helps prevent disputes, supports compliance, and demonstrates transparency if HMRC reviews your VAT recovery claims.
5. How do the new VAT rules affect private equity-backed businesses?
Private equity-backed firms are among the most affected by HMRC’s revised VAT rules. These companies often incur significant advisory, legal, and due diligence costs during fundraising, acquisitions, and restructurings. Under the new policy, such expenses can only be recovered if they’re tied to VATable business operations—not merely to investment or shareholder activity.
For example, VAT on fees for acquiring a company that contributes directly to taxable income may still be reclaimed. But if the acquisition is purely for investment purposes or involves an exempt financial activity, VAT recovery will be restricted.
HMRC is now paying closer attention to the purpose and use of investment funds. Private equity groups should review their structures, ensure service agreements reflect genuine taxable activities, and keep thorough records of fund usage to maintain compliance and reduce the risk of rejected VAT claims.