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11th October 2015 at 10:43 pm #583
VAT, cost sharing and disbursements and when to charge VAT: One of the most common areas of confusion when sharing costs between associated businesses is whether or not you have to charge VAT. Typical examples would be when one group company contracts with third party suppliers, e.g. telecoms, office consumables, rent, insurance, and then recharges a share of the cost to associated companies who use the facilities.
It isn’t always easy to work out the correct VAT treatment. If the companies are part of the same VAT group registration, then you don’t add VAT to recharges, because intra-group transactions aren’t liable to VAT, However, if the charges are made between separately registered businesses, whether companies, LLPs, sole proprietors etc, you have to work out whether or not the charge is payment for a supply and liable to VAT, or whether the payment is a disbursement which isn’t liable to VAT.
How do you decide if the payment is a disbursement?
A disbursement is when one person pays a bill on behalf of a third party and collects the amount from the third party. A common arrangement between associated businesses is that of a “paymaster” situation, where one of the parties pays for all third party goods and services and collects a share of the cost from the other businesses.
A good everyday example of a disbursement is stamp duty land tax, which is payable on certain property purchases. The solicitor will typically pay the tax and then charge to the client as a VAT-free disbursement on the invoice, along with their fee for services which is liable to VAT at 20%.
But what about arrangements between associated businesses, where one party holds accounts with all third party suppliers and collects the relevant share of the cost from the other businesses?
Let’s illustrate the distinction with an everyday example: the telephone bill.
In this scenario, Supplier Co and Recipient Co share the same premises and Supplier Co has the account with the telecoms provider.
When there is a disbursement:
Each company has a separate contract with a single telecoms provider and receive a separate invoice for their respective service; Co A’s invoice is for £40 plus VAT i.e. £48; Co B’s invoice is for £30 plus VAT; i.e. £36.
Supplier Co makes a single payment to cover both invoices to the telecoms provider and bills Recipient Co for its part of the cost; i.e. £36.
This is a disbursement. Co A is acting as a “paymaster” and simply recouping the cost of the payment from Co B. The VAT invoice is issued to each company individually by the telecoms company. Co A cannot claim any of the VAT charged on the invoice issued to Co B, nor should it charge VAT on the payment it receives from Co B.
Not a disbursement:
In this scenario, only Co A has a contract with the telecoms provider, covering the costs of its service and that to Co B. Co A receives a single invoice for the total cost; £70 plus VAT; i.e. £84. Co A makes a single payment to the telecoms provider and bills Co B for its share of the cost.
This is not a disbursement. Co A has received the supply of services from the telecoms provider, as Co B has no direct relationship with the telecoms provider.
Co A can recover all £48 of the VAT on the invoice from the telecoms provider. The VAT that relates to its own usage can be recovered subject to the normal rules. Co A can also claim the VAT that relates to the proportion used by Co B and issues an invoice to Co B for the telecoms service for £30 plus £6 VAT because it is charging Co B for the supply of the telecoms service.
Want to read more about transactions with associated businesses? Check out: “VATWoman’s Guide to inter-company services, management charges, cost sharing and much more…” an essential guidebook for dealing with VAT on transactions with associated businesses.
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