Mitigating A Client’s Tax Burden

We have been involved with a group of companies which derives its income solely from a VAT  exempt source.  Exempt incomes include, insurance, betting and gambling, financial services, undertakers, health and may include land transactions, educational and charitable sources.

Organisations however, which are not normally subject to VAT on their income cannot simply assume that VAT doesn’t apply to them.

The group straddles country jurisdictions within and outside of the EC with the main holding company and cost centre outside of the EC, based in the Channel Isles, and had assumed that as it operated outside of the EC receiving exempt income, VAT would not be an issue.

However, when the holding company sought to pass on its costs to subsidiaries within the EC via management charges, we had to point out that under the “reverse charge” accounting rules (which changed “place of supply” rules in January 2010) the recipient companies within the EC would have to account for tax at 20% on the charge as an output.  Also, since these subsidiaries ordinarily only earned exempt income, they could not offset their output tax with the equivalent input tax, as is normally the case.

Following contact with appropriate VAT advisers, we helped to set up and administer schemes which mitigated the tax burden arising from cross jurisdictional management charges.