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Handling VAT on Inter-Company Charges

Find out how to handle VAT on inter-company charges and the paperwork you need to keep for cross-business transactions.

Updated 18 August 2021

Do You Add VAT to Inter-Company Charges?

It is fairly common for two or more businesses to operate alongside each other and share costs such as wages, rent and office costs. Whether you need to charge VAT on inter-company expenses depends on the type of cost involved that need to be shared or re-charged. regardless of the type of cost involved, a sales invoice should be raised with details of the inter-company charge. Here are the most common types of expenses cross-charged and whether VAT should be added:

Wages, Directors Salaries

Where one business pays for staff salaries and then recharges a portion to another company, generally you should not add VAT to the cross charge.

Recharge of exact costs

Where one company bears the cost of an expense and recharges this back to another company in full and at the exact amount of the invoice, then there is no need to add VAT to the inter-company charge, since it is a disbursement.

Management Charges

Where one company charges another a fixed management charge then VAT should be added to the inter-company charge on the sales invoice. The company being billed the management charge will be able to claim back VAT on these expenses although a group VAT registration could avoid this.