Inter company

Vat on income from inter company originally from a third party

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We have 2 companies , Company 1 receives income from a third party before re invoicing compay 2 , Should company 1 charge Output tax to company 2 , the original  monies into company 1 were subject to 5%output tax


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By lionofludesch
13th Mar 2024 15:22


Is there a VAT group? What does your accountant advise?

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By DKB-Sheffield
13th Mar 2024 15:23

A bit confused here...

- Company 1 receives money (assume it invoiced 3rd party and reduced rate applied)
- Company 1 then re-invoices Company 2 (is that correct? Seems a bit odd)
- Question 1 is should Company 1 charge Company 2 VAT?
- Question 2 (I assume) is at what rate?

I am assuming either... Company 1 has received a supply from third party (and ia recharging to Company 2) OR Company 1 has recharged third party for a supply made to it by Company 2. Your question indicates neither, and suggests 2 entirely different transactions.

Are the companies 'grouped' for VAT purposes? If not, I'd suspect -based on a bit of guesswork - VAT should be charged by Company 1 to Company 2. There doesn't seem to be anything in your question that suggests otherwise.

As for the rate... just because Company 1 has charged, or been charged by, the 3rd party 5% VAT doesn't mean that is the correct rate for the second transaction. The rules for reduce rating are stringent and will depend on nature of the supply. You need to review Company 1's supply to see if it qualifies.

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By paul.benny
13th Mar 2024 15:23

Are your two companies in a VAT group? If not, VAT is chargeable.

The rate of tax charged on inputs is irrelevant - it's the rate on outputs. For example, coffee beans are zero-rated but grind, add hot water and they're standard-rated catering.

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By lionofludesch
13th Mar 2024 15:31

Or - put another way - tell us more.

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By Jason Croke
13th Mar 2024 15:42

Default position here is that unless there is a formal VAT group, then any supplies between connected companies will follow the normal VAT rate. In other words, you treat any recharges to a connected company like it is just any other customer.

Also be mindful that the VAT treatment of what company A buys in, may not be the same as what company A recharges to B.

For example, if A buys in air travel and train tickets (all zero rated), when recharging those onto company B, these will be standard rated because company A is not a train company or an airline. Likewise, if company A buys in services from an IT consultant who is not VAT registered and then recharges those costs onto company B, those would also be standard rated as A is making a recharge of "IT services" onto B and A is VAT registered so must charge VAT.

You don't say what these reduced rated services are, assuming it is construction related, then you just need to ensure that A recharges to B falls in line with normal VAT it a CIS supply, does domestic reverse charge apply, etc.

It is really never a good idea to have one company receive supplies/pay for things that are actually going to be paid or used by a different company, gets messy.

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