VAT liability question

[madmanc]

Hi Folks, i was wondering if someone might be able to help me with some advice.

I work for a company (A) that is in the process of merging with another company (B).

Company A is part owned by the manager, who is 3 years into a 10 year deal to pay off the other owners to obtain their shares.

Due to this situation, the owners of the companies are not comfortable with a full merger at the moment, so the plan is to share work and buildings, but to run two separate companies until they can be merged fully in 7 years.

The directors of company B have come up with the idea of forming a new company, company C will employ all staff and pay the rent on the building, it will split these costs 50/50 and invoice companies A and B for use of its services.

Company C's turnover will be over 250000k per year.

I am of the opinion that company C would have a VAT liability, and would have to charge VAT on the services it provides to companies A and B.

The directors of company B are of the opinion that company C will be able to avoid VAT liability, because A and B are VAT registered and charging VAT on the services they offer.

Can anyone offer any advice?

The other option would be for one of the companies to pay the costs and invoice the other company for half, the worry there is that HRMC will consider us one entity for VAT purposes, would the fact that companies have completely different directors and shareholders mean that they would still be consider separate companies?

or would the fact that the work is being shared by the companies means we may be considered one entity for VAT despite the companies having different directors/shareholders?

 

[Bob]

Sound like a disaster waiting to happen. Seems a very complicated arrangement when the joint companies will only be turning over £250K. The VAT situation should be sorted out by your accountants who will have specific information about what is proposed but for other matters speak to @The Resolver

 

[madmanc]

Company C's turnover will be over 250k, that is just the wage bill.

Total turnover is well in excess of 1million.

 

[Bob]

Sorry
Note to self - in future read the post more carefully
But I still think that they need to give careful thought as to how the companies A + B) will interact even forgetting C and even more important that their accountants are involved.

 

[David Griffiths]

You are correct in thinking that Company C will have a VAT liability. There will be no net cost overall because the output tax charged by Company C will be input tax for A and B. If the VAT periods are aligned - and that's not a problem - the payments all go out on the same day and there is no cash flow issue.

Is the split of wages and property costs 50-50 a fair allocation? It seems that they want to avoid a full merger but still share things. If company A shouldn't really be picking up half of the tab it will have seven years of increased costs and the deal might then not proceed leaving it out of pocket. It might make more sense for each company to pay its own full time workers but for the cost of admin and shared staff to be split, either by using C, or invoicing a share from one company to another.

HMRC are really only concerned about grouping businesses as a single entity when one of them is not VAT registered. You say that A and B are both VAT registered so that is not an issue.