Readers’ forum: Is VAT due on contra charge from customer?

One of my big clients provides marketing services to a major insurance company for a fixed fee of £100 000 plus VAT per month.

I noticed that the fee has reduced to £80 000 plus VAT for the last six months when I was preparing the year-end accounts.

My client says that the 20% discount is because the insurance company is providing software support services to my client because it has an in-house IT team that has spare expertise.

This seems a mutually beneficial deal but I wonder if there is a VAT error here ie the insurance company should issue a monthly sales invoice for £20 000 plus VAT to my client with my client’s own invoice continuing to be for £100 000 plus VAT.

The issue is important because insurance companies cannot fully claim input tax due to the rules of partial exemption. HMRC might therefore...