VAT and inter-company staff charges

Inter-company transactions, especially those involving staff provision, present intricate challenges concerning Value Added Tax (VAT) compliance. This article delves into the VAT implications of such arrangements and offers strategies to ensure adherence to HM Revenue & Customs (HMRC) regulations.

Employees

When one company supplies staff to another, this transaction is typically classified as a standard-rated supply for VAT purposes, attracting the prevailing rate of 20%. This means the supplying company must charge VAT on the service, and the receiving company can usually reclaim this VAT, provided it relates to taxable supplies they make.

To mitigate VAT liabilities, companies might consider establishing a joint contract of employment. In this arrangement, an individual is concurrently employed by multiple entities. Since the individual is directly employed by each company, there is no supply of services between the companies, thereby eliminating the need to charge VAT on the shared employment costs.

Directors

The VAT treatment for directors varies based on their roles and the nature of their appointments:

• Subsidiary Director Appointments: When a holding company assigns a director to a subsidiary, this is generally viewed as a taxable supply, akin to staff provision, and is subject to VAT.
• Common Directors: If an individual serves as a director across multiple companies and the holding company recovers fees from subsidiaries, the individual is considered to provide services directly to each company. In this scenario, there is no inter-company supply, and thus, no VAT is due on the cost recovery.

Paymaster Services and VAT Implications

In situations where one company manages payroll functions for associated companies, the VAT treatment hinges on the nature of the charges:

• Simple Reimbursement: If the company merely recovers the exact staff costs without any markup, this is treated as a disbursement and falls outside the scope of VAT.
• Additional Charges: Should the company levy fees for managing or facilitating these payments beyond mere reimbursement, such services are subject to UK VAT.

It's imperative that any paymaster service arrangement is formalised through a contract between the involved entities to delineate responsibilities and ensure VAT compliance.

Recommendations for VAT Compliance

To streamline VAT obligations and reduce potential liabilities, consider the following approaches:

1. Implement a Joint Contract of Employment: This ensures that services rendered by the individual are part of standard employment, sidestepping the classification of a business supply and the associated VAT.
2. Evaluate Director Roles: Determine if individuals qualify as common directors, which may influence VAT treatment.
3. Explore Paymaster Arrangements: Assess the feasibility of one company managing payroll services for associated entities, ensuring that any additional fees are appropriately taxed.

In instances where restructuring isn't viable, it's worth noting that VAT may remain neutral across the group. For example, VAT charged by one company can often be reclaimed by the receiving company, provided both are VAT registered and the costs relate to taxable business activities.