Dividend payment after all

A married couple carried out an investment business as a partnership and a similar business as a company. Both entities were registered for VAT.

The company sold two properties for a profit in 2006. This profit was transferred to the partnership, after the latter sent the former an invoice for £525,000 plus VAT in respect of management charges.

The company reclaimed the VAT as input tax and the partnership accounted for it as output tax. HMRC disallowed the claim for input tax on the ground that the company had made exempt supplies in respect of the relevant properties.

The company subsequently said that transaction should not have been described as management services but was in fact a dividend payment to the partnership.

HMRC did not accept the company’s assertion and issued an assessment. The company appealed.

The First-tier Tribunal accepted the company’s claim that it had approached the transaction of the funds transfer to the partnership in the wrong way. It concluded that the taxpayer had made a ‘true error’ and this had been perpetuated by the company’s and partnership’s VAT returns.

There had been no intention to deceive or be dishonest. The partnership was simply a vehicle for taking surplus funds following the sale of properties and the partners were entitled to dictate that dividends should be paid into the partnership account.

The taxpayer’s appeal was allowed. The tribunal added, however, that HMRC had acted reasonably in the circumstances, relying on information provided to them. They had been entitled to look to the tribunal for an interpretation of what actually happened.

This case shows the care that needs to be taken when transferring funds between businesses. Neil Warren, independent VAT consultant, said, ‘Management charges are often used by accountants as a way of moving profits around between different entities.

'For VAT purposes, it is very important to identify whether an actual management service is being provided in terms of costs, salaries and other overheads being recharged to a separate company.'
 

Issue: 4248 / Categories: Tax cases , VAT