New ebook: VATWoman’s Guide to inter-company supplies, management charges, cost sharing and much more…
Ever since we started www.vatexchange.co.uk in 2008, the most often visited page on the website has been an article about VAT on management services and other transactions with associated businesses http://tinyurl.com/24pubh7. I also receive more queries about this issue than any other subject, other than VAT and property.
In principle, the subject is not a specialist area of VAT – unlike, say, VAT and international services, VAT on financial services, which are both very complex. So when I started to write a book about it last summer, I thought it would be a relatively simple exercise, discussing when you can claim VAT on related costs and when you have to issue VAT invoices and other “basic” VAT principles.
But that’s where I went wrong. The more I thought about the subject, I started to see a common thread which is much more fundamental and in many ways, more difficult to explain.
The best way of explaining this is to compare it with another well-known subject; e.g. VAT and property. Most people know that VAT and property is a complex area of the law. And it is; there are special rules for many different aspects of the subject and understanding how the rules interact makes it one of the most challenging areas of VAT. But because people know that this is a complicated subject, they tend to ask for advice about the subject.
However, there aren’t many specific rules about supplies of services between associated companies or other businesses and that’s why people assume it’s not complicated.
The VAT issues relating to management charges, inter-company services and other transactions with related businesses cause problems because they SHOULD be simple, but they aren’t.
And there are two fundamental reasons for this.
The first is that very often, transactions between associated businesses are often carried out in a very informal manner, without written agreements. You might assume that SMEs would be the main culprits in this area, but I often receive queries from large corporate groups involving partial exemption and payments to/from overseas branches or subsidiary companies. You’d think that larger businesses would have formalized such arrangements, but that’s not always the case.
The second is a more technical issue and it’s usually the core of the queries I receive. And it’s this question: Can we claim VAT on our office costs and legal bills if we raise a management charge to our associated business/company?
The question goes back to one of the core principles of VAT: i.e. you can only claim VAT on goods and services used to make taxable supplies. This raises two important issues about the question:
• “Raising a management charge” – which I assume means issuing a VAT invoice or receiving a payment – doesn’t mean that services have been provided.
• Issuing a VAT invoice for services that haven’t been supplied is actually fraud, so don’t do it.
You can only claim VAT on costs if the goods/services have been used to make taxable supplies, whether to third parties or associated businesses. This sounds logical but many businesses still make the mistake of thinking that all they have to do is to “raise a management charge” – and whether you issue an invoice for supplies that have not been made or for supplies where the value is artificially inflated, you are committing an offence.
And what about HMRC’s position on this subject?
In the past, HMRC have generally been quite relaxed about transactions between associated businesses, as long as the recipient of the supplies can claim all of their VAT; i.e. don’t carry out non-business activities or make exempt supplies.
However HMRC are now challenging long standing practices and refusing to pay claims for VAT on supplies from associated businesses unless they have definitive proof that the supplies have been made. This includes situations where the businesses are gaining a cashflow advantage by using monthly returns, cash accounting and other VAT accounting schemes.
And it isn’t just a case of providing timesheets – they want to see actual evidence of work carried out. In practice, it’s even more important than ever that arrangements between associated businesses are at least as robust if not more so than those with third party suppliers.
So this is the subject of my new book about VAT on management charges and other transactions with associated businesses, which will be available from 3 June 3015.
I’ll be posting more detailed information over the next few days, so keep an eye out for my newsletter and further blogs about the subject.
Marie
26 May, 2015