Contractors' Questions: Do I have to pay my agent's VAT?
Contractor's Question: I am on a 6-month contract in Sweden. My agent is a UK limited company, as is my umbrella company. After my first month, my umbrella has invoiced my agent. They added VAT to the invoice, but my agent has refused to pay the VAT part, citing the fact that the end-client is a Swedish company and so they don't need to pay VAT. As a result, the umbrella is taking the VAT out of my own pay until the matter is resolved. Who is right? Should the umbrella be forced to not charge the VAT (given that it's for work done for an overseas client), or can/should the agent just pay the VAT and claim it back?
Expert's Answer: Sweden is inside the EU. Therefore the agency has to deal with VAT, under the rules governing VAT transactions between companies in different EU countries (which as I understand it requires the supplier to show the customer's VAT number on the invoice, but not add VAT to it – it is zero rated, from the supplier's viewpoint).
Your umbrella and the agency are both UK companies. When your umbrella charges the agency for your services, it should therefore charge VAT. The agency should pay the umbrella the VAT, and then that VAT forms part of the agency's input and it therefore effectively ends up reclaiming it from HMRC. So the agency pays the VAT to the umbrella, but should not end up out of pocket. The fact that your services are provided by the agency on to a Swedish client is, to my mind, irrelevant to the fact that the umbrella has to charge the agency VAT.
The umbrella should press the agency for payment of the VAT, which the agency is liable to pay - the umbrella has the right to sue for this if necessary. More practicably, the umbrella might press the agency to either speak to the agency's accountants, or to get the agency to check the position with HMRC. If your umbrella is reputable they should be willing to press this for you.
[My thanks to the reader who spotted my earlier error in saying that Sweden was not in the EC – I had used incorrect reference material; I have rechecked and confirm that Sweden joined in 1995]
Answer by Roger Sinclair, a consultant for Egos, an IT contractor legal advisory.