During my years of dealing with related businesses (majority being group companies) the concluding meeting point on finalising the end of year financial statements is sometimes ‘what management charges should we apply?’
To have this as a final adjustment within the related companies accounts is inappropriate and should have been considered during the trading year. Dealing with this issue at the completion of the end of year financial statements is seen as a tax planning exercise by the client where they feel an appropriate management charge can perhaps utilise losses and reduce overall Corporation Tax by the related companies.
Management charges or tax planning?
It’s not a matter of what charges to apply but what basis should the charge be applied. Could you provide detailed workings behind the management charges if this was scrutinised?
Management charges would normally be a proportion of wages and centrally incurred administration expenses recharged to each company within the group based on perhaps time or employee numbers with potentially an appropriate mark up. The approach you choose should also be used consistantly each year and not alter depending on the profits achieved.
However, even when detailed workings are available there are further issues to consider. Is an invoice actually being raised or is the charge being recorded as a monthly journal? Most importantly, if the business raising the invoice is VAT registered, VAT should be applied to the charge. The only exemption would be if the companies are in a VAT group, but there may be reasons why a business may not wish to be included in a VAT group.
Very often, no VAT is charged on management fees as from the clients point of view, there is no loss to HMRC. However on an inspection, HMRC would assess the company raising the invoices for under-declared VAT and interest and surcharges may be applied.
If the management charge is just for Corporation Tax purposes, then this may been deemed as a non-allowable management charge and a disallowance of at least some of the expenditure in the paying company may apply, but the full amount of the charge will be subject to Corporation Tax in the company raising the management charge.
We appreciate that companies are busy, but having appropriate documentation to assess the charges being raised and ensuring the appropriate VAT invoices are at least raised quarterly should show HMRC that due care and attention is being applied to the charges.
If you require any assistance in this area, please get in touch with your usual Lambert Chapman contact.