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Unexpected VAT charges can occur if a company pays expenses for another. For example, a holding company pays rent for the premises occupied by a subsidiary. When is VAT chargeable and is there a legitimate way to avoid it?

Service or management charges

Apart from any tax issues, it’s important for a business which incurs expenses on behalf of a sister company etc. to obtain a reimbursement for them. The most common examples of this are where businesses share resources, such as staff, or they are involved in joint projects. It’s good practice for the business which incurs the expense to issue an invoice for management charges to obtain reimbursement rather than by a bookkeeping adjustment.

Trap. It’s easy to overlook VAT on a management charge made without an invoice.

No invoices trap

HMRC is particularly hot on making sure businesses account for VAT correctly on recharged expenses and there are special regulations to ensure this. If the business which incurs the expenditure excessively delays or doesn’t make a management charge, an annual tax point applies, i.e. the date on which the supply of management charges is deemed to be made. This rule applies where all the following conditions exist:

  • the businesses are connected
  • one business incurs costs and overheads that belong to another business and should be recharged; and
  • the business receiving the services is not entitled to fully reclaim the VAT on the expenses.
  • Annual tax point in practice

The annual tax point is twelve months after the costs are first incurred. An extension of up to six months is allowed where an invoice is raised, or the management charge paid, in that period. The extension is there to help you where you aren’t able to quantify the management charge by the annual tax point, say because your business accounts take a few months to be finalised.

Tip. If there’s a good reason why you still can’t quantify the amount of management charge, you can ask HMRC for a further extension. It will usually give you another two or three months.

Irrecoverable VAT trap

A second problem exists if the business being invoiced can’t fully reclaim the VAT it has been charged. This can happen where some or all of the supplies it makes are exempt, or it’s not registered for VAT.

Example. Acom Ltd is an estate agent which generates all its income from commission received from selling land and buildings, i.e. it is VATable. Bcom Ltd is an associated company and a subsidiary of Acom. It’s not VAT registered because it only makes exempt supplies of financial services as a mortgage broker. Acom pays all the expenses for staff and accommodation which they share. Bcom can’t recover the VAT which Acom adds to its invoices for management charges.

Tip. The simple way to avoid both the traps we’ve mentioned is via group registration. Management charges are not VATable where the connected businesses belong to the same VAT group.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.

21st Nov 2023 09:30

VAT Management charges Tax

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