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HMRC internal manual

VAT Valuation Manual

HM Revenue & Customs
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Transfer Pricing - VAT implications: examples of particular situations where VAT may arise

If a Transfer Pricing Adjustment is made because the value of a supply was not an ”arm’s length” value, then subsequent balancing payments may raise VAT issues in the following situations.

Balancing Payment intended as further consideration

If the Balancing Payment is made as further consideration for the previous supply, then, depending on the precise circumstances and whether the original supply was a taxable supply, correction may be due under one of the following;-

  • Adjustments in the course of business - SI 1995/2518 VAT Regs 1995 Reg 38
  • Correction of errors - SI 1995/2518 VAT Regs 1995 Reg 34 or Reg 35.

In addition, if the Transfer Pricing Adjustment is directly linked to supplies which were made at less than an “arm’s length” value, then if the conditions of Schedule 6 VATA 1994 are met, an open market value direction may be appropriate.

Balancing Payment conditional for further supply

Where the Balancing Payment is made conditional by one party in return for another 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 Schedule 6 VATA 1994 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 the Tilling Management Services case (1979 STC 365) where it was agreed that the value of the management services being provided was the amount of the group relief payments that 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. See VATSC: VAT Supply and Consideration.

Two specific examples put to the VAT Authorities:

  1. 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 Payments. If there is, then there would be 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.
  2. Company A renders management services to Company B and makes 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 were an arrangement linking the supply of management services to the making of the Balancing Payment then once again there would be 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 Payments, then VAT will be due only on the monetary charge actually made for the management services.