VAT Treatment of Supplies between Associated Companies

A recent case brought before the First-Tier tribunal concerned the VAT treatment of supplies made between associated companies, Kings Leisure Limited (KLL) and Autoclassic Limited (AL) (who were not members of the same VAT group). The 2 companies were associated by way of having the same financial director and common shareholders. It was noted during the Tribunal that due to this fact, agreements between the two businesses were often informal, undocumented or incomplete.

 

KLL purchased a large area of land that was used predominantly for the placement of holiday caravans and other holiday accommodation, although gradually the use of the site changed to that of a mobile home park which contained more permanent structures. In order for a mobile home to be placed on the sight specific concrete bases were required, the construction of which were undertaken by contractors and not KLL themselves.  It is the VAT incurred on the construction charges that formed the basis of this case. AL sold mobile homes to customers and KLL then entered into arrangements with these owners for the placement of the mobile homes on the bases constructed within the land they owned.

 

The agreement between the two businesses specified that KLL would receive two payments from AL, a “Base Cost” relating to the costs of the construction of mobile homes bases aswell as a commission on the sale of the mobile homes themselves.

 

The question under consideration was whether KLL made a supply of the bases to AL, as two contracts were held by the customer, one with KLL for the right to occupy land (which in itself is a VAT exempt supply) and one with AL for the supply of the mobile home. KLL had attempted to claim input VAT for the supply of the bases to AL on the basis that it constituted a component of the onward supply made by AL to KLL.

 

The First-Tier tribunal decided that although KLL and AL co-operated with one another with a view to maximising their respective sales, the construction of the bases for the mobile homes did not form a cost component of AL’s sales and the costs incurred related solely to the onward VAT exempt supply of letting a pitch to the customer. KLL’s appeal was therefore rejected.

 

This case demonstrates the need, from a VAT perspective, to look very carefully at arrangements between connected businesses.  If you are unsure of the correct VAT treatment of an agreement made between two businesses, confirming this at the earliest opportunity could help avoid penalties being issued by HMRC for VAT errors, therefore making use of our free VAT helpline could save both time and money. 

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