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HMRC internal manual

International Manual

Transfer pricing: operational guidance: interaction with indirect taxes: interaction with VAT

Transfer pricing and VAT

Transfer pricing adjustments or compensating adjustments made under TIOPA10/Part 4 have no direct VAT consequences. However, where a business undertakes a transaction with an associated business other than on an arm’s length basis, then there may be a question about whether the value of the underlying supply for VAT purposes is less than the open market value. If so, then, depending on whether the conditions specified in VATA94/SCH6 are met, there may be scope for making a direction that the open market value is used for VAT purposes. This is most likely to be an issue if the two parties to the transaction are not in the same VAT group, or if a member of the VAT group is involved in making supplies that are exempt for VAT purposes (as then the value of supplies to other members of the VAT group may affect the amount of input tax that can be recovered).

Officers considering making an Open Market Direction for VAT purposes are encouraged to discuss their proposals with those responsible for the direct tax affairs of the associated businesses, as (depending on the particular facts and circumstances) there could be some read across to the application of transfer pricing rules.

Making a balancing payment under TIOPA10/S195 onwards solely for the purposes of correcting the cash impact of direct tax charges arising from transfer pricing adjustments does not have any VAT consequences, as balancing payments do not in themselves create taxable supplies for the purposes of VAT.

However, if a balancing payment is specifically made as consideration or further consideration for a supply, then, dependant on the precise circumstances and whether the relevant supply was a taxable supply, a VAT liability may arise. (There could also be VAT implications if making a balancing payment specifically reduces consideration for a supply, eg by refunding monies received by the party making the balancing payment.)

If any such consideration has not already been taken into account for VAT purposes, then correction may be due under one of the following;-

Adjustments in the course of business - SI1995/2518 VAT Regs 1995 Reg 38

Correction of errors - SI1995/2518 VAT Regs 1995 Reg 34 or Reg 35.

Also, the treatment of such a payment as a balancing payment should be carefully scrutinised. A payment can only be a balancing payment if the sole or main reason for making it is that a transfer pricing adjustment has to be made (TIOPA10/S195(5)). It is not open to a taxpayer to make a payment as consideration for a supply and choose to treat that payment as a balancing payment.

It is not necessary for the payment to constitute a monetary consideration for a supply to give rise to VAT implications. Where the payment of a balancing payment is made conditional by one party in return for a supply of goods or services it may, dependent on the precise circumstances, be considered in part or whole as non-monetary consideration. Valuation and/or directions under VATA94/SCH6 would be applicable.

For example, Company A might agree to provide management services to Company B if Company B agrees to make a balancing payment to Company A. In such a case Company A has agreed to perform certain services in return for a non monetary consideration - the consideration being Company B’s agreement to make a balancing payment - and it is therefore necessary to value the consideration in order to determine the amount of VAT due. This is similar to the position in Commissioners of Customs & Excise v Tilling Management Services Ltd (1979 STC 365) where it was agreed that the value of the management services being provided was the amount of the group relief payments which were made. The group relief payments as such were not taxable but the agreement and making of them represented the consideration for a supply of management services.

By way of example:

Company A might render management services to Company B without a separate charge being made for those services. The position here depends on whether there is any arrangement linking the provision of management services to, say, the procurement or making of balancing payment. If there is, then (as in the above example) there would be a non-monetary consideration for the management services which would have to be valued to determine the amount of VAT due. If there is no such arrangement, then there is no taxable supply.

Again, Company A may render management services to Company B and make a charge for those services, at the same time receiving a balancing payment. In such a case there is clearly a taxable supply of management services, but what has to be determined is whether the monetary charge is the full consideration for the supply. If there is an arrangement linking the supply of management services to the making of the balancing payment then once again there would be a non-monetary consideration which would have to be valued. In such circumstances VAT would be due on the full consideration, i.e. on the sum of the monetary and non-monetary considerations. However, if there is no link between the management services and the balancing payment, then VAT will be due only on the monetary charge actually made for the management services.