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The First Tier Tax Tribunal (the Tribunal) has recently determined that recharging expenses between connected companies was a genuine disbursement and therefore not subject not VAT.
While the case was decided on its facts, it is a reminder to companies who operate in similar fashion to review their arrangements.
A VAT charge arises where a chargeable supply of goods or services is made from one taxable person to another in the course or furtherance of a business. However, payments made as genuine reimbursement of expenses incurred are not subject to VAT.
The tax tribunal has recently considered this issue in Agilisys Contact Services Limited & InHealth (London) Limited v HMRC.
InHealth (London) Limited (InHealth) won a government tender for the provision of diagnostic services. The terms of the contract required the operation of a call centre. As InHealth did not have the expertise to provide a call centre it entered into an agreement with Agilisys Contact Services Limited (ACS) to do so (the agreement).
The agreement recorded that InHealth and ACS would employ the call centre staff jointly. ACS paid the call centre staff and recharged InHealth for an agreed portion of these costs. ACS and InHealth treated these recharges as disbursements which are not liable to VAT.
HMRC challenged this assessment. In doing so, it relied on the fact that the agreement recorded that the parties were independent contractors and that there was no joint ventures between them. HMRC therefore concluded that the charges for the joint employees should have been treated as part of the consideration ACS received from InHealth for a supply of services and was therefore a 'chargeable supply'.
The tribunal agreed with ACS and InHealth and held that the reimbursement of employment expenses from one joint employer to the other were disbursements and, therefore, not subject to VAT.
In making its decision, the tribunal noted that the wording of the agreement was not determinative. It examined the nature of the relationship between the parties and the specifics of how they operated in respect of the management of the call centre and staff.
InHealth was directly involved and in overall control of the recruitment, training, managing and supervision of the joint employees. In the circumstances, the tribunal concluded that the agreement did not reflect the reality of the situation. The relationship was not one of a supply of services by ACS to InHealth, but was instead a joint venture.
This decision turned on its facts but demonstrates that HMRC can and do scrutinise such arrangements with a view to challenging the VAT status of payments made between connected companies.
Businesses should therefore carefully consider documenting the arrangements between its connected companies and should ensure that the arrangements recorded reflect the true nature of the relationship. If the relationship is not one of collaborative venture, payments made between the connected companies might instead be a 'chargeable supply' of goods or services and therefore subject to VAT.