My client has two Ltd companies and wishes to transfer some amounts from one to the other for motoring, telephone and wages to better reflect the costs between the businesses. Both businesses are registered for VAT.
Am I correct in thinking that the business from which the costs are being transferred should raise an invoice charging the other business for these costs and that vat should be added for the motoring and telephone costs but not the wages?
Note - Occasionally one company may pay an invoice on behalf of the other but this is dealt with by way of an inter-company loan account on the balance sheet and I would see this as a different situation to the one above - am I also correct to think this?
If the companies form part of a VAT group then no VAT is charged between the component companies of the group.
If not then VAT is charged and accounted for as though they were not associated.
Does the one person control both companies or does one company control the other? Just thinking here of your tax planning opportunities and being able to transfer gains and losses. A person at the top cannot form a group for transfer of gains and losses purposes but if a third company was put in place controlling the other two with the directors controlling the first company that could reap tax advantages (although the tax bands would be halved with two group companies (or divided by three if the additional company approach is adopted)).
Legitimate transfers between companies for genuine expenses in fine however, it sounds as though the two companies are being run as a group so why not consult with an Accountant about formalising a group arrangement which may be more beneficial to your client?
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
If you want to recharge expenses between companies so that there is a fairer allocation with what is actually happening then if there isnt a VAT group and both are VAT registered then would be a management charge between the companies on which VAT would be charged and paid over in the transferor company and received and reclaimed in the the transferee company. Overall taking the two companies together the position is VAT neutral, provided of course they account for VAT the same way and have the same VAT quarter etc.
Re intercompany payments when one company pays for the expense of another then as you say this should be adjusted via intercompany loans and is different from the above as all the expenses are shown in the correct company with the liability merely being settled by a 3rd party to be refunded in due course. eg company A pays for £100 rent of Company B (assume no VAT)
Company B
Dr Rent £100
Cr Intercompany loan Company A £100
Company A
Dr Intercompany loan Company B £100
Cr Bank £100
The transaction of company A is purely on the balance sheet (no affect on the P&L) whereas management charges has an effect on the profit and loss of both companies.
