The Complexities of VAT and Intercompany Recharges

Uncontrolled intercompany recharges can pose a significant risk to businesses, especially those that are partially exempt, such as financial services. Without appropriate documentation, such as invoices and intercompany agreements, these recharges can easily go unnoticed by tax departments resulting in underpaid VAT and penalties.

Place of supply

The general rule for B2B supplies of services is they are supplied where they received. This means that when a UK business receives a supply from an overseas entity it is required to self-assess for VAT on its UK VAT return. There are exceptions to this basic rule, such as land related services, that should also be considered when reviewing recharges.

When is there a supply?

A supply for VAT purposes has a very broad meaning and is any transaction where someone does something or agrees to do something in return for a consideration. However, in certain circumstances, there can be a supply even if there is no consideration. Notably, the VAT legislation triggers a deemed tax point under specific conditions:

1. The parties are connected,
2. the recipient cannot recover VAT in full,
3. and there has been more than 12 months without an invoice being issued.

VAT can also be due when there is no exchange of payment in relation to barter transactions. Intercompany recharges can often involve the netting of supplies so that no cash settlement is required. Consider two group entities mutually providing each other with infrastructure support services of equal value—no formal recharging may occur, yet VAT obligations will still arise.

There may also be instances where a transaction fails to be a supply or is disregarded for VAT purposes. For example, recharges between members of a VAT group or between branches of the same legal entities are not within the scope of VAT. However, careful consideration needs to be given when there is a recharge from a foreign branch and either establishment is a member of a VAT group.

An area that often causes confusion is the recharge of staff between connected companies. In general, the supply of staff is subject to VAT at the standard rate. There are, however, some limited exceptions to this that need to be applied carefully and are very fact dependent.

What is the VAT liability?

Once it has been established that a supply has taken place, thought needs to be given to the liability of the supply. In particular, whether the services are capable of being treated as exempt under the financial services exemptions.

Single or multiple supplies

A company may provide a range of support services to a connected entity but only raise a single monthly invoice. Thought needs to be given as to whether there is a single supply or multiple supplies, potentially with different VAT liabilities. The answer to this question is very fact specific. The supporting documentation, i.e. the invoices and inter-company agreements will be the starting point when determining the answer however the economic reality of what is being provided is also important.

Conclusion

Intercompany recharges can represent a significant risk area for partially exempt corporate groups. It's crucial for Tax and Finance teams to collaborate effectively to ensure that all intercompany supplies are correctly identified, and that supporting documentation accurately reflects the services provided.