I’ve had some fantastic feedback about my book “VAT on inter-company transactions and management services”, which is now available on Amazon in paperback. It deals with a range of everyday transactions, from cost sharing to disbursements to management charges, that apply to both transactions with associated businesses AND third parties.
When I first started writing this book, I was thinking about the many queries I get about transactions between associated businesses. However the book is so much more than this, because in practice, the same principles apply whether you’re splitting the phone bill with an associated company or between third party property tenants. Whether you or your client are calculating annual management charges or simply charging a third party for the use of excess office space and facilities, this book will help you work out the VAT liability.
This blog is a very deliberate plug for the book itself, but I’ve explained below a really important principle about this sort of transactions to give you an idea of what the book is about. Also, here’s a link to the book’s Introduction : Introduction Inter-company transactions july 2018 which is one of the most important parts of the book.
So what is the problem with this sort of transaction? As I’ll explain briefly below, it’s all about identifying what the payment represents. In practice, the transactions can be difficult to categorize, irregular and separate to a business’s core business activities. Sometimes the values are not very large, so business owners don’t want to pay good money for you to sort it out. A good example is sharing out the cost of insurance: I’m sharing the cost of the insurance bill between tenants/associated businesses, do I add VAT?
Some of you will know that I have written a couple of other books about VAT and property development, but it’s this most recent book that I firmly believe should be on the bookshelf of every accountant.
That’s a bold statement to make, so why am I so confident about this?
The subject of inter-company transactions and management charges is difficult for a number of reasons. Here are the most important:
- Every month since this website was launched, the most visited pages on the website have been a couple of articles about management services – on average about 60%, which is more than the total of any other pages, including VAT and property. So I know that people are confused about these issues.
- The information contained in this book covers a wide range of subjects that are covered in a number of HMRC VAT notices. Each of the notices is very good, but most issues like management charges or cost sharing cover a number of different subjects. Even if you know which notices to read, chances are it will take a long time for you to make sure that you’ve covered all of the right ones.
- Very often, the values involved in these transactions is quite low so businesses tend to overlook them. If HMRC comes along and looks into them, the time and cost incurred in sorting them out can be disproportionate.
- Businesses sometimes think that the simple answer is to charge VAT on everything. But that’s not the right answer, because the recipients CAN’T CLAIM VAT THAT HAS BEEN CHARGED INCORRECTLY.
So why is it so difficult?
Let’s go back to basics and the question about sharing insurance costs. The problem is that before you work out the VAT liability, you have to ask another question:
What is the payer getting for their money?
That brings us back to the fundamental VAT issue: is the payment consideration for a taxable supply? So the answer to the question “do I charge VAT if I’m sharing out the insurance bill” is that it depends on whether the amount being charged is payment for a taxable supply.
So how do we work out the answer? Most of us know that insurance is normally VAT exempt. However that only applies if the provider is authorised as an insurer under the provisions of the Financial Services and Markets Act 2000 (FSMA) as explained in VAT Notice 701/36: Insurance. Otherwise, insurance is standard rated.
However, that’s only part of the answer. It may be that sharing out the bill is actually a disbursement, which is explained in VAT Notice 700: The VAT Guide; and therefore VAT free if the “recipient” is named on the policy. Or, if the insurance is charged as part of a property service charge, then it may be exempt or standard rated depending on the VAT liability of the rent, as explained in Notice 742: Land and property.
So to answer that one single question, you would have to get the right information by asking the right question, look at a minimum of 3 different VAT notices and then you may still not be sure whether you have the right answer.
And finally, what about those inter-company transactions?
I also wanted to address the issue of transactions between group companies – often from the group holding company to separately registered subsidiary companies who are separately registered for VAT. The amounts of money involved with such transactions can be significant, calculated by reference to group profits or costs at the year end. If the holding company has provided services that are liable to VAT, then it should issue VAT invoices for the payments.
However, in the case of such arrangements between associated businesses, whether for management services or other work, such as consultancy services or for the use of certain key employees, it’s not uncommon for there to be no written agreement such as a management services agreement; or the agreement doesn’t reflect the real situation.
HMRC is increasingly vigilant for such situations and will refuse VAT claims by businesses who have claimed VAT charged on such transactions if they do not believe that the services have been provided or that the value of the services does not reflect the true value of the amount charged.
I have seen situations where HMRC has assessed VAT claims of several hundreds of thousands of pounds because the supplying company could not prove, to HMRC’s satisfaction, that it had carried out the work shown on the invoices concerned. In one case, a potential multi-million pound manufacturing group who was negotiating very large value contracts with major high street retailers ended up going out of business because of this specific VAT issue.
Like any technical book, this book won’t give you all the answers. But it will help you to ask the right questions and that will help you to find the right answers. Buy the book and let me know what you think.