How do you assign VAT on intercompany expenses?
One of the VAT issues that businesses face on a daily basis has to do with VAT on the recovery of costs, also known as intercompany costs.
This is when you pay for goods or services for a company and then recover the cost of the good or service from this company.
But confusion here comes with whether to charge VAT on the recovery of costs and, if so, who can claim input tax and who pays output tax.
So then, let's look at an example of the recovery of costs and how to allocate VAT in this matter...
Company A is a VAT vendor which pays for the entertainment expenses for its subsidiary, Company B. The tax invoice is made out to Company A for R11 400 (R10 000 + R1 400 VAT).
At the end of the month, company A recovers this entertainment cost from Company B, as it's Company B's expense.
Now, for VAT purposes, the recovery of this cost is as follows:
. Company A pays the tax invoice, because the supplier issues the tax invoice in Company A's name. But company A can't claim the R1 400 input tax because input tax is denied on entertainment. So then, Company A's cost is R11 400.
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2. Company A then gives a tax invoice to Company B for the R11 400 plus R1 596 VAT. The description on the tax invoice is now 'management fee'.
Company B can claim the R1 596 as input tax because there are two supplies made here, with the first one being the supply of entertainment to Company A and the second one being the management fee from Company B.
Company B now claims input tax, not on entertainment, but on the supply of a taxable service, which is a management fee in this case. This is irrespective of how Company B allocates this amount within its books.
But now, if for example, Company A acted as an agent of Company B in terms of an agent and principal agreement, it doesn't claim input tax or levy output tax. Company B will pay Company A the full tax invoice value of R11 400 so that Company A will not have lost money in the transaction. But Company B can't claim the VAT of R1 400 as input tax because it relates to entertainment. Company A won't issue a tax invoice to Company B here, but rather a statement to recover the payment it made on Company B's behalf.
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