Shifting the cost of VAT

Where you run more than one business and they share overheads, allocating these costs between the companies might lead to a VAT charge. But the good news is there's a fairly simple way to avoid this.

Management charge

Example. There were two associated companies, Man Co and Small Co. Small Co hadn't been registered for VAT because its turnover didn't exceed the threshold for doing so (some £77,000 since April 1 2012). Man Co was the parent company and invoiced some charges for services to Small Co during the course of the year. Man Co did not charge VAT.

VAT visit. The VATman came to visit and queried why the management charge hadn't been subject to VAT. He raised an assessment on Man Co for output VAT on their management charges. The problem is that Small Co can't get this VAT back because it wasn't registered for VAT at the time.

However, there are a number of ways of reducing the amount of VAT that is potentially due on any management charge, or even removing the VAT charge completely.

Reducing the VAT cost

VATable supply? If the management charge is simply a way of transferring funds from one company to another it is quite possible that no supply has taken place. Accounting entries or invoices are not sufficient evidence on their own of a supply having taken place. If you can beat the VATman on the following questions you will have established that there is no supply of services.

Question 1. Do the supplies exist? The charge could be just a book figure whose value does not represent any actual supplies.

Question 2. What do the supplies consist of? For example, if a director of both companies provides consultancy services, then no supply has occurred because his services are provided in the capacity of director of the second company.

Question 3. How are the supplies costed? Do the values expressed have any relation to the supplies they are supposed to be for? For example; (1) Paymaster services. If you are recharging for the use of other staff, it will normally be a taxable supply unless they have joint contracts of employment. Or one company employs the staff, but for administration reasons, are paid by the other, which then recovers the wages from the first company. These are not VATable; and (2) Insurance. If insurance is being recharged make sure that both company's names appear on the insurance policy. This way it can be treated as the disbursement of exempt insurance rather than a component cost of a management charge and, therefore, VATable.

Timing

Regular invoices. If you make one management charge at the end of the year, the VATman will view it as one composite VATable supply of management charges. If you can split up the component parts of the charge and invoice them throughout the year, then the actual liabilities of each supply can be applied, therefore, reducing the VAT due.

VAT group. You could also consider forming a VAT group in the future and include the unregistered company in it. Any inter-company charges and sales would then be disregarded for VAT purposes. There are a number of other factors to take into account when forming a VAT group so advice should be sought in advance.

If you need any more information on VAT or any other tax issues, please contact us on 0191 3864786 or by emailing information@westwaters.com

Shifting the cost of VAT

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