HMRC's latest VAT guidance for private equity houses

Private equity houses (PEHs) and venture capital trusts (VCTs) in the financial industry must navigate complex VAT principles for compliance and efficiency. With both exempt and taxable supplies, incorrect VAT treatment could be costly. Significant VAT exposures, compliance breaches and unnecessary irrecoverable VAT costs could arise in the absence of effective VAT planning, controls and procedures.

We are aware that HMRC have sent several nudge letters to PE fund managers, sparking what could be the start of a campaign by HMRC focusing on VAT compliance within PE funds.

Overview of the latest VAT guidance

Given the VAT complexities pertinent to the financial industry, in February 2025, HMRC issued new guidance – PE79000 to help ensure compliance with the VAT rules. The new guidance highlights VAT risks in the industry, focusing on input tax deduction, inappropriate partial exemption methods, and failure to account for reverse charges. This guidance complements the VAT guidelines for compliance 8 (GfC8) issued in September 2024, which recommend approaches to governance, controls, and processes for VAT accounting.

HMRC are “helpfully” drawing the industry’s attention to PE79000 inviting them to review and consider if their current VAT accounting procedures are compliant and if not, to remedy the position though the Error Correction Notice procedure if appropriate.

Key actions for private equity houses

Considering the new guidance issued, and HMRC’s correspondence, it is very important that PEHs and VCTs act. The expectation is that this is an area HMRC may seek to review, given the significant potential exposures. In which case, we would suggest the following steps:

1. Review the new guidance at PE79000 issued by HMRC in February 2025
2. Review your current VAT accounting
3. Consider all areas where your VAT accounting is non-compliant with PE79000
4. Determine and quantify any potential VAT exposure in (3)
5. Consider changes required to current VAT accounting to ensure compliance going forward
6. Consider VAT planning required to mitigate irrecoverable VAT, particularly pre transaction
7. Implement procedures to periodically review VAT accounting arrangements
8. Document the revised changes to VAT accounting procedures and communicate to relevant staff
9. Consider VAT training for staff

How can we help you?

Our VAT transaction team are experienced in undertaking such reviews. We can assist you to identify and mitigate any VAT exposure. If you haven’t reviewed your VAT accounting arrangements, now’s the time!