Share this content
27

Vat on management charges

Vat on management charges

Didn't find your answer?

If a holding company charges a subsidiary a 'year end' management charge, what are the vat consequences? as a lot of people seem to believe that this charge is not vatable, if so what are the reasons why?

Appreciate that in many cases the holding company will not be vat registered due to the level of turnover.

 These charges are not specifically 're-charges or reimbursement of costs, but a non specific management charge, some clients seem to charge vat and others not,

Many thanks

Replies (27)

Please login or register to join the discussion.

avatar
By BKD
20th Aug 2011 17:47

VATable

Unless:

a) holding company's taxable turnover, including the charge, is below registration threshold or

b) there is a VAT group in place

Thanks (0)
Replying to marklee:
By petersaxton
20th Aug 2011 22:06

Don't agree

BKD wrote:

Unless:

a) holding company's taxable turnover, including the charge, is below registration threshold or

b) there is a VAT group in place

Does it matter if it's below the registration threshold?

I thought the important point was whether it was VAT registered.

Thanks (0)
avatar
By BKD
20th Aug 2011 22:29

To clarify

My scenario a) presumed that the company was not VAT-registered. Of course, if the company is VAT registered - turnover below threshold or not - VAT will be due.

Thanks (0)
Replying to aburt01:
By petersaxton
21st Aug 2011 09:46

still not right

BKD wrote:

My scenario a) presumed that the company was not VAT-registered. Of course, if the company is VAT registered - turnover below threshold or not - VAT will be due.

If they were not VAT registered and the management charge took them over the threshold they would still not charge VAT on the management charge until they had to be registered for VAT or chose to be registered for VAT.

 

Thanks (0)
Replying to davidwinch:
avatar
By BKD
21st Aug 2011 11:52

What is so hard to understand?

petersaxton wrote:

BKD wrote:

My scenario a) presumed that the company was not VAT-registered. Of course, if the company is VAT registered - turnover below threshold or not - VAT will be due.

If they were not VAT registered and the management charge took them over the threshold they would still not charge VAT on the management charge until they had to be registered for VAT or chose to be registered for VAT.

 

That is pretty much what I said. So, for the avoidance of doubt:

If the company is already VAT-registered - regardless of turnover level - VAT will be due.

If the company is not VAT-registered (and isn't required to be), no VAT will be due on the management charge unless that charge will cause turnover in the next 30 days to exceed the limit, in which case registration will be required and VAT will be due on the charge.

If the charge causes the historic 12-month test to be breached, registration will be required (for the avoidance of doubt, no VAT on the charge itself) unless it can be demonstrated that turnover in the next 12 months will be under the deregistration limit.

Clear?

Thanks (0)
By petersaxton
21st Aug 2011 12:54

third time lucky

Yes, third time lucky. The first two comments you made were wrong but the third time was right.

It's best to be clear about it otherwise people will not understand the situation.

Thanks (0)
Replying to AnonymousUser:
avatar
By BKD
21st Aug 2011 14:02

Actually

petersaxton wrote:

Yes, third time lucky. The first two comments you made were wrong but the third time was right.

It's best to be clear about it otherwise people will not understand the situation.

They were not wrong - you just didn't understand them. Admittedly, I should have been a bit more expansive with the first response for the hard of understanding, but there was nothing incorrect in what I said. In parcticular, would you like to point out exactly what is incorrect about my second comment.

Thanks (0)
Replying to cswan:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
24th Aug 2011 10:28

Keep it clean, boys

BKD wrote:

They were not wrong - you just didn't understand them. Admittedly, I should have been a bit more expansive with the first response for the hard of understanding, but there was nothing incorrect in what I said.

Can I support Paul's request to try and maintain some professional decorum in spite of your semantic differences. There are some interesting nuances within this debate, but they're in danger of being buried by invective. Please also remember our official policy against personal abuse.

Thanks (0)
By petersaxton
21st Aug 2011 15:10

Wrong answer is not wrong and it's the people not understanding?

 

Your first comment included:

“Unless:

holding company's taxable turnover, including the charge, is below registration threshold”

It clearly doesn’t matter whether the holding company’s taxable turnover is below the registration threshold if they are registered for VAT because they would have to charge VAT anyway if they are registered.

Don’t try to make out I don’t understand. You were wrong and you are unwilling to admit it.

What was incorrect in your second comment was that you weren’t considering that the supplies in the next 30 days were sufficient to take them over the limit. I accept that in most scenarios this wouldn’t be relevant but with a holding company and management charges it could easily be relevant.

Thanks (0)
avatar
By BKD
21st Aug 2011 15:36

Wrong or not clear?

"It clearly doesn’t matter whether the holding company’s taxable turnover is below the registration threshold if they are registered for VAT because they would have to charge VAT anyway if they are registered."

Don’t try to make out I don’t understand. You were wrong and you are unwilling to admit it.

I'm quite willing to admit that I my first response did not go far enough. My assumption was that if the turnover was below the threshold the company was not registered. My second post clarified that assumption, it did not correct my first comment. The only thing 'incorrect' about my first response is that I did not state my assumption. There is a difference, which you are clearly unable to grasp.

"What was incorrect in your second comment was that you weren’t considering that the supplies in the next 30 days were sufficient to take them over the limit."

Yes I was - I just didn't say so, which is why I said so above. Again, that is expanding my answer not correcting it. In fact, your 'still not right" comment is in itself "wrong" since it does not make it claer that that 30-day test might apply. I'm sure you were thinking of this whan you posted that remark, but it certainly isn't clear.

I'm willing to accept that an answer that does fully explain each and every scenario may be less than complete, and as a result sometimes worthless. But that does not make the answer wrong. My response was given in the context of the question, which was whether or not management charges are, in principle, VATable. I wasn't aware that it was a question about registration (which if it had been I would have gone into a full explanation about the various tests)..

 

But if you can't tell the difference, and want to insist that I was wrong, fair enough, it's not worth further discussion.

Thanks (0)
Teignmouth
By Paul Scholes
21st Aug 2011 15:31

Is this the right room for an argument?

Either you two are married or you both need to go back to bed and get out the other side.

I think the confusion over such charges comes from the point made by BKD that many groups operate under VAT grouping, meaning that inter-company charges & sales are not VATed.

Thanks (5)
By petersaxton
21st Aug 2011 19:32

Best to only consider supplies after present VAT position known

How I would look at it is in the following order:

1 Is there a Group VAT Scheme? If yes, no VAT charged.

2 If no, is the holding company registered for VAT? If no, no VAT charged.

3 Should they be registered for VAT?

Paul, I am married but I dont know about BKD.

 

Thanks (0)
Replying to batemap:
avatar
By BKD
21st Aug 2011 20:51

Sorry, you're wrong

A more correct order (not necessarily the right one) would be:

1 Is there a Group VAT Scheme? If yes, no VAT charged.

2 If no, is the holding company registered for VAT? If yes, VAT charged

3 If no, should they be registered for VAT? (with particular regard to the 30-day test)

4 If no, no VAT charged

5 Will they need to register under the 12-month test? If yes, should they form a VAT group?

Etc etc

 

See how easy it is to get things wrong?  ;)

 

Thanks (0)
avatar
By Old Greying Accountant
21st Aug 2011 22:47

Peter ...

... I don't think there is room in the relationship!

Thanks (1)
avatar
By DMGbus
21st Aug 2011 23:37

Not VATable if...

If the management charge is to reflect just the time / efforts of common directors I think that you'll find that it can NOT be liable to VAT - regardless of amount above or below VAT limit historically past 12 months or within next 30 days.

To be liable to VAT the management / service charge / "profit moving invoice" needs to be more than for just the common directors time.

 

 

Thanks (0)
Replying to RogerNeale:
avatar
By BKD
22nd Aug 2011 08:24

Largely agree

DMGbus wrote:

If the management charge is to reflect just the time / efforts of common directors I think that you'll find that it can NOT be liable to VAT - regardless of amount above or below VAT limit historically past 12 months or within next 30 days.

To be liable to VAT the management / service charge / "profit moving invoice" needs to be more than for just the common directors time.

 

It depends on what is actually being re-charged. If the charge is a bona fide one based on the time etc of directors then there may yet be a supply involved and so VAT will be chargeable. I agree that if there has been no supply (as was found in the Newmir case), then VAT may not be due, but that raises the question of whether the charge would be CT deductible in the hands of the payer.

 

Thanks (0)
avatar
By DMGbus
22nd Aug 2011 08:54

Non-VATable even if "bona fide"

The supply by a company of the services of a director to another company of which he/she is also a director is not a supply for VAT purposes and therefore can NOT carry a VAT charge even if "bona fide".

So, I reiterate the point that I made, for there to be a charge to VAT on the service charge / management charge / "profit moving invoice" there has to be something MORE THAN / OTHER THAN for purely common directors time be it "bona fide" or not.

Thanks (0)
Replying to Anonymous:
avatar
By BKD
22nd Aug 2011 09:44

Can you provide the authority for this

DMGbus wrote:

The supply by a company of the services of a director to another company of which he/she is also a director is not a supply for VAT purposes and therefore can NOT carry a VAT charge even if "bona fide".

So, I reiterate the point that I made, for there to be a charge to VAT on the service charge / management charge / "profit moving invoice" there has to be something MORE THAN / OTHER THAN for purely common directors time be it "bona fide" or not.

My understanding is that where the directors perform identical functions for the respective companies there is unlikely to be a supply of services. But where there is a different supply (the clue is in the wording, and I can think of many examples) from one company to the other, a taxable supply may well arise. So, can you please provide the authority which says that there can never be a supply in respect of directors' services?

Thanks (0)
Replying to Anonymous:
avatar
By bduncan
24th Aug 2011 11:30

Holding Companies Only?

DMGbus wrote:

The supply by a company of the services of a director to another company of which he/she is also a director is not a supply for VAT purposes and therefore can NOT carry a VAT charge even if "bona fide".

So, I reiterate the point that I made, for there to be a charge to VAT on the service charge / management charge / "profit moving invoice" there has to be something MORE THAN / OTHER THAN for purely common directors time be it "bona fide" or not.

 

Is this just holding companies or is it companies with common directors? As I have a single director company charge for his time to another company that he is one of three directors and he has been charging VAT.

 

Thanks

Thanks (0)
Replying to Anonymous:
avatar
By DMGbus
25th Aug 2011 09:12

Not just holding companies

It is my belief that the rules applied by HMRC although referring to "Holding Companies" do NOT just apply to holding companies.

A basic principle of VAT is what is important as in "No supply means outside scope of VAT".

So, for a management charge to be liable to VAT there has to be a supply.

So, to justify the VAT charge, the company making the charge has to show that it is supplying something to the other company.

The few cases of management charges that I currently deal with where management charges are applied are legitimate recharges of computed costs where overhead costs are shared so no problem demonstrating a supply and applying VAT (although I sometimes check the quantum of the charge to justify tax deduction for CT / IT in the accounts of the business paying the charges)..

What I have been wary of for many years now is the apparent use of management charges seemingly to just move profit from one company to another as it does seem to sometimes be little more than what I have described as a "profit moving invoice" with, quite likely little to justify it as a supply.   This, I believe, is where HMRC are coming from in their guidance and the HMRC reference to holding companies I guess is purely because that's where HMRC most commonly come across this issue. 

So, in my view, to justify the management charges involving common directior companies, I would look for one (preferably more than one) of the following:

The directors receive some remuneration from the charging companyThe charging company bears some costs that it can legitimately pass onto the other company (at a profit / mark up is perfectly OK)An ability to show that the company receiving the management charge invoice has received some benefit

 

 

 

Thanks (0)
avatar
By DMGbus
22nd Aug 2011 10:34

Practical experience & HMRC Internal Guidance

Four years ago I came across a holding company that was refused VAT registration even though its management chaerges exceeded the VAT registration threshold.  

HMRC Internal guidance supported HMRC's stance of refusal to register the holding company...

 

" 10.5.3 Holding companies

Detailed information on the treatment of holding companies can be found in V1-13.

With holding companies, ‘management charges’ may be the only supplies that appear to be made. If these relate to supplies actually made the holding company is entitled to register for VAT and reclaim input tax. Therefore it is necessary to check that supplies are actually being made in order to confirm the registration is valid. Indicators that a supply is not being made include:

 

No staff are employed by the holding company.

The directors are common to both the holding company

and the recipient of the services.

The company has no business premises or assets.

There is no visible or documentary evidence of supplies

other than the invoice and/or bookkeeping entry.

The trader is unable to specify what supplies are covered

by the charge.

 

Thanks (0)
avatar
By DMGbus
22nd Aug 2011 10:36

HMRC Internal Guidance (continued)

* No staff are employed by the holding company.

* The directors are common to both the holding company

and the recipient of the services.

* The company has no business premises or assets.

* There is no visible or documentary evidence of supplies

other than the invoice and/or bookkeeping entry.

* The trader is unable to specify what supplies are covered

by the charge. 

Thanks (0)
avatar
By BKD
22nd Aug 2011 10:49

Yes

I was aware of that guidance - but that is all it is, guidance. Further, it simply gives a list of indicators (not proof) that a supply is not being made (and the list is not necessarily exhaustive). I have seen plenty of cases where there are common directors, but that there are quite clearly distinct, and evidenced, supplies having been made. I don't therefore consider it correct to say that where there are common directors, there can never be a VAT charge - all the circumstances need to be taken into account and my view is that it would require more than one of the indicators listed above to be present before concluding that no VAT is chargeable.

Again, though, I agree that a charge in respect of directors' services only, where the directors' functions are the same for both companies, is unlikely to amount to a supply.

Thanks (0)
avatar
By BKD
24th Aug 2011 11:00

Point taken, John

I think my mood was darkened as a result of goings-on in other threads, but no excuse for taking it out on others. So apologies to all other contributors to this thread for any offence - none was intended.

Thanks (3)
By petersaxton
24th Aug 2011 11:24

BKD

Just to make it clear. I have no doubt that you know what you are talking about. I just thought it was worth clarifying your rushed comment - which we all do at times.

Thanks (1)
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
24th Aug 2011 12:33

Kudos to BKD, Peter & DMGBus

Thanks for putting so much effort into pinning down the precise definitions and circumstances that apply to VAT for management charges - and for responding so positively to the pleas for calm. It made our day over here at Aweb towers.

Thanks (1)
By Becky Midgley
24th Aug 2011 12:41

It sure did!

Thanks :)

Thanks (1)
Share this content

Related posts