VAT, intercompany charges and management charges: I was looking at my Google Analytics statistics today to see who’s been visiting the website and which pages over the past month. There was quite a lot of traffic to the pages about my ebook “VAT and residential property development”, but that’s to be expected as I’ve been blogging about it a lot over the past few months.
But the most popular pages are still the pages about more every day stuff, in particular VAT on intercompany charges, management charges, and disbursements. And it’s not surprising, because while “big” projects like property development are complicated and involve large amounts of money, it’s the more mundane stuff that most businesses are dealing with on a daily basis.
And the other thing is that when HMRC officers inspect the records of “fully taxable businesses” – the manufacturers, professional services, consultancy services, tradesmen, retailers, import/export businesses – they are less likely to find errors in the company’s main trading records, but will almost certainly find mistakes in the handling of issues such as fuel scale charges, entertainment costs, disbursements and especially periodic “recharges” for shared costs between associated businesses. It’s not unusual for the VAT officer to identify a number of such errors and issue an assessment for a few hundreds of pounds, made up of a lot of smaller amounts. And while these amounts might not cause problems for large or profitable businesses, an unexpected VAT bill can be quite a problem for a small businesses whose cashflow is already very tight, and has limited access to additional funds.
I sometimes wonder if this current generation of VAT officers are genetically indisposed to find directors’ personal costs, such as home decoration, the latest gadgets for their car, home telephone bills!
But that’s not to criticize the officers, they’re only doing their job. I did the job for about 5 years and can tell you that the job isn’t glamorous and sometimes it’s downright depressing, but somebody has to do it. And while none of us enjoy paying tax, the simple thing is that it’s our taxes that keep the country running. Unless, of course, you’re a famous pop singer or comedian. But I digress.
So how do you avoid making mistakes?
I think that the accountants, book-keepers, administrators and others who prepare VAT returns deserve a medal for getting most of it right most of the time. Even as a full time VAT consultant with lots of experience, I still don’t remember all of the detailed rules for every situation and almost always checking out the law or HMRC’s guidance for detailed points. For most people who prepare VAT returns, it’s only one of several jobs they have to do, from tax, to payroll, to balancing the bank accountants, managing the P&L and making sure that the business has money in the right place at the right time to keep running.
Some of the most common errors occur because businesses don’t know where to find the right information, or rely on out of date copies of VAT notices. So there are a few things you can do to help reduce mistakes:
- Find the correct VAT notice for each subject – if you don’ t know where to look, check out HMRC’s library of VAT notices http://tinyurl.com/6xzys5z for a full listing. And if you’re still stuck for information, put a query on the forum here and I’ll tell you where to look!
- Make sure that you’re using the most up to date versions of HMRC’s VAT notices. The most current versions are now available online so there’s really no excuse for not using the right version.
- Make sure you update things that change regularly through the Budget – update your fuel scale charges at the same time as updating your payroll records.
Understand what it is you’re charging
But by far the most common of errors happen because people don’t always understand what it is they’re charging and whether to add VAT. For example, a cleaner is employed by company A. However the cleaner cleans all of the premises, including those parts that are used by the associated company B, and those common parts of the building. Because the cleaner’s wages are VAT free, company A doesn’t add VAT to the recharge of the cost to company B. However, if company A is registered for VAT, it has to add VAT to the recharge of the cleaners’ wages. The recharge represents consideration for the provision of cleaning services to company B, not the sharing of employee costs. The recharge would only be VAT free if the cleaner was jointly employed by both companies and the recharge was made to cover company B’s share of the wages.
That’s a fairly simple example, but it illustrates the point quite well. I’ve discussed the subject of inter-company recharges in an article. I wrote it in 2010 but the main principles are still valid and you’ll find it a useful introduction to the subject.
In the meantime, I’ll be blogging about other intercompany recharge issues over the next few months. And of course, if you have any specific queries, remember to post them on the forum and I’ll do my best to help you out.
Marie
May 2014