This is the second of 3 posts discussing VAT on transactions between assocated businesses.  In this post, I’ll be taling about terminology and how otherwise everyday words or phrases can have quite different meanings for VAT.

Remember the basic principle – you can only issue a VAT invoice if you have “sold” goods or services in return for payment.

VAT liability?

So, the first thing is to establish what exactly has been “supplied” and whether the goods or service is liable to VAT at 20%, 5%, 0% or exempt under VAT law,  

 You might assume that the easiest approach is to charge VAT in any situation – you avoid the risk of under-declaring VAT and HMRC don’t usually complain if they get overpaid! But unfortunately, it’s not that simple. If you don’t establish the correct VAT liability right from the start, you can end up with unexpected VAT assessments or irrecoverable VAT that could have been avoided.  VAT on transactions between associated businesses can be a very messy subject, often because the businesses don’t correctly analyse the reason for any payments and the reason for the transactions.

My book “VAT on transactions between associated businesses” explains when such payments are liable to VAT and discusses practical ways to avoid mistakes.  After all, you want to focus your time generating profit on your core business activities, not quibbling about the right division of the telephone bill. The book also explains when special rules apply to payments – such as property costs, staff costs, motoring costs and cross-border transactions, as discussed in Chapters 7 to 12. 

What’s a contract? 

I’m not a solicitor, but I think it’s important to consider the concept of “contract” in the context of transactions between associated businesses. 

My Oxford dictionary defines contract as: “a written or spoken agreement intended to be enforceable by law”.  I talk abouit this throughout the book and Chapter 15 discusses in more detail what you might include in a contract for VAT purposes. 

As I said in the Preface, you’re not legally required to have written contracts for VAT purposes. Solicitors, accountants, VAT consultants and other professionals usually recommend having written contracts to properly establish the arrangements for transactions between separate legal entities.  This includes associated parties or third parties and prevent confusion when dealing with HMRC or other third parties. 

The difference between “intra” and “inter” 

There’s often confusion about transactions between associated businesses.  Sometimes this is because people get their terminology mixed up. 

“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. 

Supplier Co and VAT recovery

The answer to the question: “Can we claim VAT on our office costs and legal bills if we raise a management charge to our associated company?” depends on whether Supplier Co is providing taxable services to Recipient Co. However Supplier Co can also claim VAT if it uses the services to make any other taxable supplies to third parties. Simply issuing an invoice could actually be a criminal office

This means that you can’t just look at the arrangements between Supplier Co and Recipient Co in isolation.  You also have to consider whether Recipient Co can claim VAT on charges from Supplier Co. If Recipient Co makes exempt supplies or carries out non-business activities, then it may not be able to claim VAT charged by Supplier Co.  In this case, the VAT is simply an additional cost, so it’s also important to consider Recipient Co’s VAT recovery situation.

But by far the most important aspect of this issue is that the recipient can only claim VAT if the “supplier” has actually made goods and services – as I’ve said before, many times, “issuing a VAT invoice” does little other than to create a debt to the crown, which must be paid even if the supplier has not provided any services.  “Management services” might sound good in practice, but you have to be able to back up those invoices and prove that the services were carried out.

Group registration 

Of course the logical way to avoid mistakes on intra-group transations is to use the group registration facility,   In this situation, transactions between members of the group are not regarded as “supplies” for VAT purposes, so the charging company doesn’t have to add VAT to their invoice.  Group registrations are by far the most logical way for large corporate groups to arrangement VAT affairs and minimise their VAT costs.  Check out more information on HMRC VAT Leaflet 700/2: Group and Divisional regisration https://tinyurl.com/y28vb32o.

But it does come with a word of wording.  As you’d expect, the law includes various measures to prevent companies from taking advantage with group registration – such as minimising VAT on property costs.  Also, group registrations work for associated limited companies – so if your concern is with a third party, or a non-corporate organisation, then chances are you’ll find that you have to go back to the drawing board and consider the issue the old-fashioned way.

Either way, if you’re in any doubt about the real nature of the goosd and or services proviced between any businesses, associated or not, make sure you write it down in an agreement and, most importantly, be able to demonstrate that the goods and/or services have been supplied,

Marie

March 2022

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