Q:
Hi There
One of our subsidiarys (outside EU) employees has just made a visit to the UK. We have just paid the hotel costs for them and I was wondering – when I re-charge – do you need to add Vat on top of this invoice?
Many Thanks
A:
The VAT treatment of hotel costs and any intercompany recharge is a real pain in the proverbial backsides. For the purposes of this reply, I assume that the invoice for the hotel was issued to your company and not teh overseas company.
But to begin with, I must explain that the VAT treatment of intercompany recharges can be very messy and ultimately depends on the arrangements between teh parties concerned. It may well be that the costs you are recharging form part of an intercompany service where the cost is calculated by reference to the costs incurred. In that case, my comments here might not help as I can’t give advice relating to any specific recharge here on the forum. There are some articles on the website about intercompany recharges that give more detailed information – just type “intercompany recharges” into the search box and it will take you to the relevant pages.
But if that’s not the case and it is simply that you’ve paid a bill for an employee of an overseas company and wish to recoup the cost, I’ve explained the main principles about recharges of hotel bills here and hopefully this will help you to work out what you need to do in respect of the costs you are dealing with.
The normal rule is that such transactions fall within a scheme called the “Tour Operators Margin Scheme” (or “TOMS” for short) whereby holiday companies don’t recover VAT on the costs of their hotel, travel, food and drink etc supplied to holiday makers, but only charge VAT on their profit. It’s a very complicated subject and is covered in VAT Notice 709: Tour Operators Margin scheme which is here XXX on the HMRC website.
In the past, businesses who paid for such costs and recharged the costs to other businesses for their own consumption, ie for their employees use and not for resale as part of a holiday package, were allowed to treat the costs under normal VAT accounting rules. This means that they would recover the VAT on the hotel invoice as input tax and charge output tax on the recharge.
From 1 Jan 2010, this has changed and businesses are now required to treat all such transactions under the TOMS. See section 3.3 of notice 709. This means that you can’t recover VAT on the hotel’s invoice, but you only have to charge VAT if you make a profit on the recharge. So if the hotel bill is for £100 plus VAT of £20, the total is £120 and you can’t recover the VAT as input tax. If you only recharge £120, then you don’t charge any additional VAT. If you decide to add a mark up, say £30, then you’d account for VAT on the markup, treating it as VAT inclusive, so you’d include 30 x 1/6, ie £5, as output tax on your tax return.
But YOU MUST NEVER ISSUE A VAT INVOICE TO YOUR CUSTOMERS FOR SUCH SUPPLIES, i.e. AN INVOICE WHICH SHOWS VAT AS A SEPARATE AMOUNT. This is because the customer is not entitled to recover any of the VAT – ie on the original hotel bill or on your mark up – as input tax.
If, howver, the invoice from teh hotel was issued to the overseas company, but your company paid the bill and you are merely recharging the VAT inclusive cost, then you wouldn’t add VAT to your “invoice” as it wouldn’t be for a supply made by your company, merely for a disbursement paid for by you on their behalf. This would be more useful as it would enable the overseas company to claim the VAT on the hotel bill under the overseas business refund scheme, if they are eligible to use the scheme.
Hope this helps, but I know it’s not an easy subject!
Marie