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How does the Vat treatment of scrip lending differ from the sale of shares?

by , 14 January 2014
In terms of Vat law, scrip lending and the sale of shares fall under financial services. While this is the case, the Vat treatment for the two differs. Read on to find out how the Vat treatment of scrip lending differs from the sale of shares.

Don't know how the Vat treatment of scrip lending differs from that of the sale of shares?

The Practical Vat Loose Leaf Service has an explanation for you.

What is the Vat treatment of scrip lending?

Before we get to the Vat treatment, let's define scrip lending.

What is scrip lending?

Scrip lending is also known as securities lending arrangements.

Scrip lending is a transaction where the owner of a share (the lessor) enters an arrangement with another person (the lessee) where the lessor loans a share to the lessee for a fee.

A similar share must be given back to the lessor.

This means the lessee can deal with or even get rid of the share, as long as a similar share is given back to the lessor when the contract expires.

For example, FinCo owns 100 shares in MineOp.ABC Pty Ltd enters a scrip lending agreement with FinCo on 1 January 2014. FinCo will give 50 of its MineOp shares to ABC Pty Ltd for two years.

ABC Pty Ltd agrees to return 50 similar MineOp shares to FinCo by 31 December 2016. ABC Pty Ltd sells its 50 MineOp shares to XYZ Pty Ltd on 31 January 2014. ABC Pty Ltd still has to buy 50 similar shares on or before 31 December 2014 to return them to FinCo.

Scrip lending usually involves listed shares. The lessor wants to earn extra income from a share portfolio without affecting the value of the shares or getting rid of them. The lessee would hope the replacement value of the shares is less than the current value.

The shares are put in the name of a third party who acquires the share or scrip direct from the lessor.

So what's the Vat treatment when it comes to the sale of shares?

Let's look at the Vat implications on the sale of shares.

The issue, allotment or transfer of ownership of an equity security, like a share, counts as a Vat-exempt financial service.

For example, BankCo owns 100 shares in ShopCo. BankCo sells 50ShopCo shares to BuyCo at R100 per share. BankCo gets R5 000 from BuyCo.

This sale of shares from BankCo to BuyCo is Vat-exempt. This means BankCo can't claim Vat on selling the shares.

Warning: Scrip lending fees aren't Vat exempt!

If a vendor enters a scrip lending arrangement, the scrip lending fees are payment for the shares. So the fees aren't Vat-exempt.

This means the lessor must charge and account for Vat on the fees received from scrip lending transactions.

The bottom line: The difference in the Vat is that the sale of shares is Vat-exempt. And scrip lending fees, on the other hand, aren't.

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