PE79250 - Guidance for specific trade sectors: Private equity and venture capital: Activities of PEHs

A PEH’s principal purpose is to generate a capital return or profit for its investors. The intention of the investment process is to generate a return or profit on investment activities which is used to reward the investors and the investment management company. Without the investors providing investment there would be no subsequent activity. The funds will be invested using the skills of the investment management company in accordance with the various legal contracts between the parties.

The mere holding of shares is not an activity which falls within the scope of VAT. The decision in Polysar refers (see vit64050).

Management services provided by the PEHs will be considered taxable business activities. This approach is in line with the CJEU case in Larentia + Minerva & others (see vit40100.)

The PEH:

  • usually prepares a prospectus in order to attract investors;
  • seeks out companies to invest in;
  • engages (normally taxable) professional services from independent third parties needed in order to acquire the investee company. These will include legal advice and due diligence to ensure that the investee company is worth the investment risk; (NB acquisition services such as due diligence, while generally engaged by the PEH, are normally supplied to BidCo if the investment structure includes such a body);
  • provides a supportive/consultative role in developing the investee company (the degree varies subject to the PEH’s strategy) - often through the appointment of a director under the terms of an Investment Agreement or by the provision of other forms of consultation / administrative services;
  • continually monitors the value of the investee company and plan for the eventual realisation at exit;
  • usually supplies separate corporate finance type advisory services to the investee company;
  • in larger and more complex deals may negotiate investment, or lending, by independent third parties to the investee company;
  • sometimes invests its own capital, in addition to that from third party investors, into the investment fund.

Investors may include the following:

  • institutional or High Net Wealth individual investors who commit themselves as limited partners to lend capital to the limited partnership, to be invested by the general partner (GP);
  • wealthy individual investors (‘business angel’);
  • a venture capital trust plc (‘VCT’), which obtains its funds by public subscription and the investment decisions are made by a separately VAT registered investment manager;
  • investment banks and other financial institutions.

Please see the Glossary in the VAT Finance manual for further details of these and other terms which you may come across in this sector.