Oracle AGIS – Should we always create a VAT invoice for intercompany recharges?


One of the main reasons why the Oracle AGIS module was created was to ensure that the correct VAT was charged on intercompany transactions when an intercompany journal was created. However, many sites that I work on will still recharged or allocated costs from one legal entity to another as a direct journal with no VAT considerations. Is this correct or should every intercompany recharge where it is form one legal entity to another be subject to VAT. I am not a VAT expert, so would like to through this out there to see what the correct action should be.
As an example, take a situation where Company A is registered for VAT but company B is not. Over the course of the month, company A incurs the costs of several services that is recovers the VAT on fully. But then at the end of the month it recharges a proportion of these costs to company B. If AGIS is used to recharge these costs but no AR or AP transaction is created and so no VAT is calculated, then has VAT fraud been committed as VAT that would have otherwise been absorbed as an expense for company B has actually been fully recovered by company B!
What is the correct way – should a VAT invoice always be charged between two legal entities? Are there cases when VAT is not required, are there certain expenses such as interest and insurance that do not need to have a VAT invoice raised or should a VAT invoice still be raised with a VAT Exemption made clear? What if the two legal entities shared the same VAT number as part of having one VAT number of the Group?