Cost sharing problems
VAT was introduced 40 years ago as a straightforward purchase tax, but has developed into something very tricky. Take, for example, a simple situation where two companies share the same business premises and so split the costs and VAT reclaimable. Whether one, two or more businesses share the VAT it won’t alter the overall amount involved. Nevertheless, sharing the costs in this way can lead to VAT assessments and penalties.
Who has the right to reclaim VAT?
Only the business to which the supply is being made can reclaim the VAT. This means where a company makes a purchase which is intended to be shared, it can only reclaim VAT on a portion of the cost. So what happens to the rest of the VAT.
Are you a VAT agent?
A business can be classed as an “agent” for another where it pays an expense, processes the paperwork and passes on some of the cost to another business which then reclaims its share of the VAT. The trouble with this arrangement is that HMRC has strict conditions on when it can apply. One of these is that the other business must be“liable” for the cost. For example, if a property lease is in the name of one business only, it will be liable for the whole rent and can’t pass a share of this on as an agent.
Are you making a supply?
If there’s not an agency arrangement, then the business liable to the VAT must reclaim it in full and then recharge the cost to the other business(es) involved. The recharge will usually count as a supply by the first business and so it must charge VAT. Common examples of where this can apply are:
- a parent company buys goods and services and makes them available to its subsidiaries
- staff costs are recharged to subsidiaries
- overheads, such as the cost of company vehicles and telephone/Internet services.
The business recharging the costs must charge VAT and provide the other business with a VAT invoice so that it can include a claim on its quarterly (or monthly) return.
Trap. Recharging shared costs counts as a supply of services in its own right. Therefore, VAT at the standard rate (20%) must be added to recharged costs, even where they were exempt or zero-rated when supplied to the first business.
Group management charges
A slightly different approach can be taken where limited companies and limited liability partnerships (LLPs) are connected, i.e. controlled by the same people. They can shift costs by making management charges. These can be for more or less than the actual shared cost and so can be used to shift expenses between businesses rather than just sharing them equitably. And there’s another advantage.
Tip. Connected companies and LLPs can register under one VAT number as a group. In this situation the business recharging the cost or making a management charge doesn’t have to charge VAT.