We’re getting towards the end of the calendar year and I’m already getting queries about VAT on year end management charges, so I thought it was a good time to revisit a very common subject area.  Inter-company and intra-company transactions and VAT are one of the most common causes of VAT errors on transactions with associated businesses is because people get their terminology muddled up.

For VAT purposes, a “supply” is normally only made between separate legal entities; the most common being sole proprietors, partnerships, limited liability partnerships and limited companies.

But in the case of transactions between associated businesses, it’s often not clear who is supplying whom. This is often because of habitual use of outdated titles, or less formal terms; for example referring to partners as directors (or vice versa); or using the term “company” when referring to a partnership; or “head office” when referring to a holding company. Corporate groups often use the term “division” to refer to different companies so forget that transactions between the “divisions” may be liable to VAT.

A lot of common errors could be avoided by correctly defining the relationship between the supplier and the recipient of the goods or services

For example, if you get used to thinking of head office as the holding company, you’ll get used to the concept that it’s a separate legal entity.

I recently heard the following comment referring to payments for services between connected companies:

“If it’s inter-company, you don’t have to worry about the VAT”??

I assume that the phrase means that if a transaction is “inter-company”, then you don’t have to charge VAT.

But I’m not really sure if this is what is meant. And it brings me back to one of the most common areas of confusion that lead to mistakes in VAT.

The difference between “intra-company” transactions and “inter-company” transactions.

My Compact Oxford dictionary gives the following definitions:

• “Inter” means among other things; between.
• “Intra” means on the inside; within.

In other words:

“Inter-company” means between separate companies; e.g. parent company to subsidiary.

“Intra-company” means within a single company; e.g. the sharing of head office costs between separate divisions of the company.

If you identify the correct legal entities and whether the transactions are “inter-company” or “intra-company” then this is a good starting point to make sure that you get the VAT treatment correct.

What about “intra-group” transactions?

A good place to start is “intra-group” transactions; i.e. between separate companies in the same corporate group. If the companies have separate VAT registrations, then the VAT liability of any transaction is the same as transactions with third parties.

A common mistake is that “intra-group” transactions is the same as transactions involving members of VAT group registrations.

Being part of a corporate group is NOT the same as being part of a VAT group registration.

A corporate group is a generic term referring to companies who are under common control or ownership. Just because you’re in a corporate group does not mean you’re in a VAT group. Each individual company is liable to register for VAT in their own right and must treat transactions with associated companies in the same way as any transactions with third parties.

Companies who are part of a corporate group usually qualify to register under a single VAT registration.

However companies under common control may chose to register under a single VAT group registration. In this case, transactions between the companies are “disregarded” for VAT purposes, which means that VAT is not charged on the supply of goods or services between VAT group members.

The criteria for VAT group registration is explained in detail in HMRC’s VAT Notice 700/2: Group and divisional registration.

Check out my book for more information on this subject!

The VAT group is registered in the name of the “representative member of the group” who submits a single VAT return for all companies in the group.

Transactions between members of a VAT group registration are not liable to VAT.

It’s also possible for separate divisions of a company to register for VAT separately as divisional registrations, also explained in HMRC’s VAT Notice 700/2: Group and divisional registration . However transactions between separate divisions are NOT supplies for VAT purposes and therefore not liable to VAT.

International transactions

The supply of services to overseas companies may be free from VAT under the “place of supply” rules. However the VAT liability of international services is a very complex area and I’d strongly recommend that you read up on the rules in VAT Notice 741a: Place of supply of services if you don’t know much about this area of VAT.

It’s also particularly important to correctly identify the nature of the services being provided, because “management services” may be liable to UK VAT, even though the recipient is an overseas company. Also, if your business receives services from abroad, you may have to account for VAT on the cost of services under the “reverse charge” rule.

Finally, unlike transactions between divisions of the same company or members of UK VAT groups – i.e. “intra-company” or “intra-VAT group” – you may also have to charge UK VAT or pay reverse charge VAT on transactions involving overseas divisions or companies with establishments outside the UK.
This is a particularly complicated area of VAT and I’d strongly recommend that you invest in professional advice to get the VAT accounting correct.

Whether the transactions are between UK businesses or overseas businesses, you need to know the legal and VAT registration status of the parties involved to get the VAT accounting correct.

There’s a lot more information about this subject in my ebook: “VATWoman’s Guide to inter-company services, management charges, cost sharing and much more…”.

And if you’d like some help on this matter in your business, simply drop me a line to marie@vatexchange.co.uk and we’ll arrange a call.

Marie
November 2016