What exactly is a management charge? I’ve just released a new ebook VATWoman’s Guide to inter-company services, management charges, cost sharing and much more… and one of the most important subjects is management charges.
The book was written in response to queries about transactions between associated businesses and one of the most common is whether you can claim VAT on costs if you raise a management charge. I’ve discussed all of this in detail in the book.
But I’ve always thought this concept of “raising a management charge” is a bit strange. What exactly is a management charge?
It might seem like a stupid question – presumably it’s a charge for management services. But when I receive queries asking about “raising a management charge” it often seems as if the client doesn’t know what the charge represents, other than possibly giving them a way to claim VAT on costs..
And this is very important for VAT purposes, because if you issue a VAT invoice or receive payment for services, you have to know exactly what sort of goods or services the invoice/payment represents, so that you can establish the correct VAT liability.
One very common reason for raising management charges is to move profit between associated businesses. This is typically calculated by reference to profits at the year end and the “management charge” is a way of shifting profit from one business to another. But what does it actually represent? It might be a viable way of moving profit between businesses to reduce taxable profits, but that doesn’t mean it’s payment for goods or services. 
I recently blogged about the importance of only charging VAT when you’ve made a supply of goods or services that is liable to VAT. So if you’re “raising a management charge”, is it payment for a supply of services? I assume it’s services because I’ve never come across a situation where management charges are payment for goods.
The term “raising a management charge” doesn’t actually mean anything for VAT purposes – the act of “raising” (i.e. creating) an invoice is not the same as issuing an invoice to a customer. For the purposes of this blog, I’m referring to the issue of invoices.
This really important because if you issue a VAT invoice for services and no services have actually been performed, then technically you’ve committed both a civil and criminal offence for VAT purposes.
And that’s only the start of the matter. Because if you’re providing services to associated businesses, HMRC will expect to see evidence that services have been provided in a commercial manner. The term “management services” is normally used to describe services provided by directors or senior managers, including managing the day to day activities of a business, or providing advisory or consulting services. But whatever the nature of the service, remember you can only issue a VAT invoice if there is a direct link between the services performed and the payment requested.
It’s now more important than ever that transactions with associated businesses are as robust as any with third parties, if not more so.
This applies whether we’re referring to companies in large corporate groups or SMEs or individuals who do business as sole traders and limited companies. If you issue a VAT invoice for services that have not been performed, or the value charged is different to the amount you’d charge a third party, HMRC may take the view that the VAT has been charged incorrectly, which means that the recipient of the invoice is not entitled to claim the VAT, even if the issuer has declared and paid the VAT to HMRC.
This doesn’t mean that you can’t “raise a management charge” to move profit between associated businesses, but you can only add VAT if the charge is payment for a taxable supply of services.
If you want to know more about this subject, check out my new ebook VATWoman’s Guide to inter-company services, management charges, cost sharing and much more….
Marie
June 2015