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inter-co recharges attracting retrospective VAT

Vat exempt service but caught by cost of Google reverse charge exceeding threshold 6 years ago.

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Hi, first time poster feeling overwhelmed. I've recently started a new group role and have opened a can of worms; the group has just completed a voluntary retospective VAT registration going back 6 years (exempt final service but Google reverse charge exceeded reg threshold 6 years ago - although this was not a  identified as an issue until now). Our VAT advisers say this means inter-group recharges for shared office costs over the period are, frustratingly, attracting retrospective VAT. As our final service is exempt from VAT we cannot recover it from HMRC - so it's a P&L hit. Inter-co invoices were issued and paid over the period.  The recharge was used rather than get the overhead (e.g. rent, utilities, IT support) suppliers to invoice each company seperately as it was not seen as an issue. The figures were a broad brush nod to the management accounts that some overheads are being shared.  The 5 trading companies are managed by one board of directors and are part of a group for corporation tax purposes.  My question is, could we issue credit notes for the inter-company recharge invoices to avoid the VAT leakage - particularly in the current financial year which ends in June20? My boss says the VAT advisers have said we can not as the tax point was set by invoices being paid - I feel this may be wrong but was hoping some experts on here could provide some insight before I push it further?  Thanks for reading, any help would be very much appreciated.




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Hallerud at Easter
17th Feb 2020 14:31
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By spidersong
17th Feb 2020 15:33

I may be dense and missing something here but I'm not seeing much of a cost apart from the reverse charge tax for the google expenses (and potential penalties and interest). As a side point I'm not sure how this is a 'voluntary' backdated registration if you've exceeded a statutory threshold but that's presumably just semantics and you mean 'unprompted' registration rather than voluntary.

Are a number of the suppliers not registered for VAT? If not then I'm not sure how this is impacting the bottom line (again) of the group.

Surely the original cost including VAT was booked by one company and then a gross recharge was booked to the others. Was the recharging party making a markup?

Otherwise I assume it goes A gets a charge for, say, £600 plus £120 VAT, the VAT is not recoverable so they have a charge for £780 which they share out for Co.s B to F at £120 each. Old World order gives a cost of £120 for each company hitting the bottom line.

New World Order: They have a cost of £600 plus £120 VAT, they're making an onward taxable supply of most of this and so can recover £100 of VAT, restrict the £20 attributable to their exempt activities and then charge their compatriots £100 plus £20 of VAT each, bottom line for B to F is £120 cost. Their bottom line has £100 still there and £20 of irrecoverable VAT. Net hit still £120 and still would be even if retrospectively accounting for VAT on the recharges that have already taken place as if doing it at cost the VAT they should have charged is the VAT they are now able to recover.

So all I can see resulting in a hit to the bottom line (apart from Google stuff) is if a) they used largely unregistered suppliers so now are the first taxable link in the chain, b) they're making a markup and so there's some 'profit' VAT to account for, or c) HMRC are arguing the nature of the costs changes i.e. exempt incoming rent is now a taxable operating licence or 'office services' or dreaded 'management charge' or something. But if this is a recharge of actual operating costs then I'd assume the recharges can be couched as following through the original nature of the charge and so VAT can flow through with little effect.

As I say apologies if I've missed something obvious in the OP that addresses this.

Also as to the tax point, then really that's just set by the tax point [email protected] first of supply, invoicing, or payment. So if all three of them or even just a couple are done and dusted then they'll be set in stone.

Other than that if there are even minimal external supplies then as DJKL suggest a VAT Group may be a get out although more difficult if you've already done the registration.

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Replying to spidersong:
By spidersong
17th Feb 2020 15:35

The joy of adding up or fat fingers or something my example of course should be £720 not £780 as that doesn't split to 6 * £120 and isn't £600 + £120, and I can't be bothered to press the edit button.

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By johnt27
18th Feb 2020 10:02

Take the advice of the VAT experts you've been given!

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