I have been asked if this can be done, I'm not sure if it can. Whilst I dont think it's illegal, I also don't think its within the spirit of the law.
A VAT registered business trading in products, orders items and claims the tax back then sells them at a reduced price including VAT to a none VAT registered business which they also own, so the none VAT registered business can make more profit on the items.
Im not sure about this so have delayed for doing done research into this.
It is illegal as they are effectively reclaiming VAT where the purchase was not for them but for a related business.
Effectively company A (VAT registered) is buying goods for related company B (non VAT registered) in which instance company A is not able to reclaim VAT (although they "mistakenly"(!) already have done in the belief that they can reclaim all VAT that they have suffered).
You sometimes also see this with VAT registered companies paying the bills of non VAT registered members of the same group in the mistaken belief that they are able to reclaim the VAT.
You would actually become part of the fraud if you filed in the VAT return of company A.
For further detail refer to sections 25 and 26 of the VAT act.
Also, in the group accounts any unrealised profit in inventory would need to be reversed.
Also, the profit on the back of a fraud, I assume is in order to secure financing for company B. This would result in the directors (and possibly the accountants) being chased for damages by the financial institution involved and as this is an intentional fraud there would be no veil of incorporation to hide behind (the directors would be personally liable).
I would advise the firm concerned to seek the advice of their accountant and if it was their accountant who advised this approach then I would advise them to seek a second opinion from a different one.
kindest regards,
Shaun.
__________________
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.
