How can you avoid charging VAT on Inter-Company Charges? 1

TAX FREE and VAT FREE grunge rubber stamps

There are situations where one company is VAT registered and other related companies are either partially exempt or not registered for VAT, so in these circumstances not charging VAT is an advantage.

The following are not Taxable supplies for VAT:

Common Directors – Notice 700/34 (May 2012)

An individual may act as a director of a number of companies. For convenience one company may pay all the director’s fees and then recover appropriate proportions from the others.

The individual’s services, such as attending meetings or approving expenditure, are supplied by the individual to the companies of which they are a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore there is no supply between the companies and so no VAT is due on the share of money recovered from each company.

Joint Employment – Notice 700/34 (May 2012)

Where staff are jointly employed there is no supply for VAT purposes between the joint employers. Staff are jointly employed if their contracts of employment or letters of appointment make it clear that they have more than one employer. The contract must expressly specify who the employers are for example ‘Company A, Company B and Company C’, or ‘Company A and its subsidiaries’.

Paying a Bill on behalf of an associated business

This is basically an inter company loan which will be repayable in full, its not a taxable supply.

Insurance

If insurance is being recharged and both businesses names are on the policy it can be treated as a disbursement of an exempt insurance so that its not vatable.

steve@bicknells.net

When should you charge VAT on inter company recharges? 1

3D Vat button block cube text

The answer depends on whether you have made a Taxable Supply or not.

A vatable inter company charge would be where one company buys business services and goods from suppliers and shares them with another related company so for example the invoice might say:

Recharge from Company A to Company B

10% Insurance

5% Rent/Rates

8% Motor/Travel

12% Office Salaries (but check notes below on employment)

As long as the charges have a logical and reasonable basis for them then these costs can be recharged plus VAT (even if the original item such as insurance wasn’t originally vatable)

However, the following are not Taxable supplies for VAT:

Common Directors – Notice 700/34 (May 2012)

An individual may act as a director of a number of companies. For convenience one company may pay all the director’s fees and then recover appropriate proportions from the others.

The individual’s services, such as attending meetings or approving expenditure, are supplied by the individual to the companies of which they are a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore there is no supply between the companies and so no VAT is due on the share of money recovered from each company.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000871&propertyType=document#P87_8714

Joint Employment – Notice 700/34 (May 2012)

Where staff are jointly employed there is no supply for VAT purposes between the joint employers. Staff are jointly employed if their contracts of employment or letters of appointment make it clear that they have more than one employer. The contract must expressly specify who the employers are for example ‘Company A, Company B and Company C’, or ‘Company A and its subsidiaries’.

Paying a Bill on behalf of an associated business

This is basically an inter company loan which will be repayable in full, its not a taxable supply.

Why does this matter?

An article in Tips and Advice  – VAT issue 11October 2012 reported that HMRC have applied penalties of up to 30% of the error where incorrect treatment has been applied.

So it is very important to get the VAT treatment correct.

Alternatively you might consider forming a VAT Group so that you don’t need to charge VAT on inter company charges but this isn’t always a practical solution as it means changing the VAT registration and doing a single return for all companies/businesses in the VAT group.

steve@bicknells.net