VAT on Transfer Pricing?

In the ever complicated world of tax, an Advocate General has opined that Transfer Pricing adjustments could be liable to VAT … this is interesting on a number of levels as often accounting adjustments are disregarded for VAT purposes, as they are not supplies.

We’ve yet to see whether the ECJ will follow this opinion – which is for the case of Arcomet Towercranes, whereby the Romanian authorities denied the business’ right to deduct VAT on certain invoices, arguing that the company failed to prove that the services were necessary for its taxable transactions.  These invoices related to a Transfer Pricing agreement that was in place.

Whilst the UK is not bound by new EU law following Brexit, one key takeaway point here is that tax authorities continue to look at the ability to recover input tax and the UK is no different.  This is an easy target for HMRC as they can refuse VAT recovery where this was not lawfully charged to begin with, and its an easy win for them.  Businesses paying VAT in good faith should take extra care that the VAT was correctly charged.  This is also important on inter-company charges, e.g. management fees without substance may not be liable to VAT.  This is tricky – should companies put out invoices for management charges without adding VAT, and how would HMRC feel about that?

For businesses it will seem that whichever way they go there is a risk of HMRC challenge, but in short, where there is doubt we recommend talking to your advisor.