VAT on inter-company transactions and management charges

Description

One of the most common questions I’m asked by clients is: do we charge VAT on management charges?

You’d think that the answer to this would be quite straightforward. In principle, if your business provides management services to an associated business, then the answer is yes.

However management charges are often raised for a wide variety of reasons; from sharing office costs, head office services, property or insurance costs and sometimes simply as a way to move profit around a corporate group.

The common thread is that in many cases, the parties themselves aren’t sure what the transactions represent and there is no written agreement between the parties.  And if VAT is charged incorrectly, then the payer is not allowed to claim the VAT on its VAT return.

I’ve seen situations where HMRC have disputed whether services were actually made, even where there was evidence including timesheets for work done and an intra-group agreements. Businesses have been left with massive VAT bills because they couldn’t identify exactly the nature of the services received from associated companies.

And this same principle applies to other “routine” payments relating to office costs, staff costs, insurance and other such transactions both with associated businesses and third parties.

This means that you have to know what the payer gets in return for their money.

Once you’ve established the facts, you then need to consider how VAT applies to the goods and/or services involved to work out whether the charge is liable to VAT. This means understanding how basic VAT principles work, as well as more detailed knowledge about a range of issues such as VAT and disbursements, property costs and transactions with overseas branches or subsidiaries.

This can be a very complex and messy subject. If HMRC asks questions and you don’t have the answers, it can cost a LOT of money and take an inordinate amount of time to sort out. In this book, I’ve explained the principles involved with a lot of practical advice to help you save time and money on what should be everyday transactions.