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How to allocate Vat on intercompany expenses!

by , 26 May 2015
Each day businesses have to deal with Vat on the recovery of costs. This is called 'intercompany expenses' and it refers to the situation when you pay for goods/services for a company and then recover the cost of the goods/services from this company, e.g. your subsidiary company.

The problem appears when it comes to charging Vat or not on the recovery of costs. And if so, who can claim input tax and who pays output tax?

Let's look at an example of recovery of costs and how you allocate Vat in this matter.

This example reveals that you need to know about Vat and the recovery of costs

Company A is a Vat vendor and pays for the entertainment expenses of its subsidiary, Company B.
The tax invoice is made out to Company A for R11 400 (R10 000 plus R1 400 Vat).

At month end, Company A recovers this entertainment cost from Company B (as it is Company B's expense).

Keep in mind that for Vat purposes, the recovery, or on-charge of this cost is as follows:

1. Company A pays the tax invoice, as the supplier issues the tax invoice in Company A's name. But Company A can't claim the R1 400 input tax, as input tax is denied on entertainment. So Company A's cost is R11 400.

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2. Company A then issues a tax invoice to Company B, for the R11 400 plus R1 596 Vat. The description on the tax invoice is now 'management fee'.

3. Company B can claim the R1 596 as input tax. The reason for this is there are two supplies made here.

The first one is the supply of entertainment to Company A, and the second supply is the management fee from Company B.

4. Company B now claims input tax, not on entertainment, but on the supply of a taxable service (in this case, a management service). This is irrespective of how Company B allocates this amount in its books.

But, 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 pays Company A the full tax invoice value of R11 400, so that Company A is not out of pocket. But, Company B can't claim the Vat of R1 400 as input tax because it relates to entertainment. Company A doesn't issue a tax invoice to Company B, but merely a statement to recover the payment it made on behalf of Company B.

Here's the rule on businesses, Vat and the entertainment industry:

SARS will let businesses who provide meals, refreshments and accommodation, claim input tax on items constituting 'entertainment'. As long as they recover the full costs from their customers.

Note: The Vat on the cost of meals and refreshments provided on busses, planes, trains and ships isn't denied when included in the ticket price.

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