How to make ‘recovery of cost’ under VAT

  • Share:

Taxability of ‘recharges’, typically applicability of VAT is a subject matter of debate and interpretation across the VAT jurisdictions. The term ‘recharge’ also commonly known as ‘recovery of cost’ is generally not defined in the legal statues but has gained significant importance from a VAT determination viewpoint, purely because it is not clear whether a recharge in itself involves any supply of goods or services attracting VAT.

A recharge happens when there are three entities involved. For example, Entity B incurs costs charged by Entity A which are then recharged by Entity B to Entity C. In each of the supplies, the VAT treatment could potentially change, depending on nature of the transaction, relationship between the entities and whether recharge is at cost or with a mark-up.

The challenge in determining the VAT liability for recharges are multi-fold.

First, it needs to be determined whether the costs that are recharged were incurred for customer’s direct benefit or were they, in fact consumed by the supplier and later recharged to the customer.

Second, it needs to be determined whether the recharge in itself constitutes an independent supply or is it ancillary to the principal / main supply. Also, it is equally important to ascertain whether the person reimbursing the amount is acting in the capacity of an agent (i.e. recovering payment made on behalf of another person) or recovering the expenses incurred as a principal.