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VAT on espenses paid direct

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    VAT on espenses paid direct

    My limited co is VAT registered. I am working for a client (which is not vat registered) through an agency (which is vat registered).

    The Agency pay my daily rate so no problem.

    But the client insists on paying my expenses directly. If I get them paid to MyCo then they won't pay the VAT and so I loose a percentage of the total.

    The client is willing to pay direct to me. Would this get me out of having to pay VAT on the expenses? Or would IR/HMCE think this was VAT avoidence?

    #2
    looks like one for an accountant to reply to, don't you have one?

    Comment


      #3
      It's actually worse than that. If the client is paying you directly it will weaken any IR35 defence quite significantly, since you are clearly "part and parcel" of the organisation. [/hector mode off]

      Anyway, to answer the original qestion, speak to an accountant - but AIUI (and I may be wrong) if you have incurred output VAT you can offset it against input VAT whether or not you can pass it up the food chain. After all, who paid the VAT element of the PC you bought for YourCo? Don't forget, VAT monies don't really exist in terms of YourCo's P&L.
      Blog? What blog...?

      Comment


        #4
        Originally posted by one
        My limited co is VAT registered. I am working for a client (which is not vat registered) through an agency (which is vat registered).

        The Agency pay my daily rate so no problem.

        But the client insists on paying my expenses directly. If I get them paid to MyCo then they won't pay the VAT and so I loose a percentage of the total.

        The client is willing to pay direct to me. Would this get me out of having to pay VAT on the expenses? Or would IR/HMCE think this was VAT avoidence?
        I'm an accountant...

        Your end-client is not in a position to demand that you recharge your expenses without VAT. The basic principle of VAT is that it is borne by the end-consumer - ie Joe Bloggs the unregistered individual or unregistered business who ultimately consumes the goods.

        Try walking into PC World and refusing to pay VAT and see how far you get...

        You need to discuss this with your client and negotiate accordingly, but the only legitimate way that you can save them the VAT cost is to recharge less of the expenses - which would obviously leave you out of pocket.

        This whole situation appears to make little sense anyway. If your end-client is paying (presumably) substantial fees to you as a VAT-registered trader, they would presumably be better served by being VAT-registered themselves.

        On a personal level, you should bear in mind that you are employed by your own company, not by your end-client. That could perhaps lead to the Inland Revenue treating the expenses as being taxable, because they would not have been incurred in the course of performing the duties of your employment - because you are not employed by the end-client.

        You personally incur the expenses in the course of your employment with your own limited company, which in turn reimburses you and in itself incurs those costs in the course of fulfilling it's contract with the end-client.

        Your own company is VAT-registered and must therefore charge VAT on the expenses it recharges to the end-client. This is a basic premise of VAT. With very few exceptions (legal firms for instance do NOT need to charge VAT when recharging court costs), a VAT registered trader MUST charge VAT, even if the amount being charged was for an expense on which no VAT was incurred in the first place.

        This can actually result in what appears to be a double VAT charge. Say for instance you incurred a cost personally of £100 + VAT = £117.50. Your company should reimburse you for £117.50 and should recharge the end-client for £117.50 plus VAT = £138.06.

        In practice though, this apparent double VAT charge will not normally happen because the bulk of your expenses will presumably be for travel costs on which no VAT was incurred by you in the first place.

        Anyway, I digress...

        At the end of the day, these expenses should be recharged by your company, not you and your company is obliged to charge VAT accordingly.

        For you to keep on the straight and narrow AND avoid your end-client incurring the VAT cost, your company would need to recharge a lower expenses amount, which is hardly going to be your preferred option as it would obviously leave your company out of pocket.

        Time to sit down with your client methinks...
        Last edited by Taxman; 30 September 2005, 14:58. Reason: An error in the paragraph re legal firms

        Comment


          #5
          Taxman, your posts are top class!.

          Comment


            #6
            To simplify, I you purchase something and need to claim it on expenses, then you would normally get a VAT receipt and the client should re-imburse you to the value of the receipt, including the VAT. The end client then recovers the VAT through it's own procedures.

            If you're claiming mileage, there is no VAT.
            Do you think people who pack the confectionary into boxes at fudge making factories tell people what they do for a living?

            Comment


              #7
              Re:Expenses

              Originally posted by Taxman
              I'm an accountant...

              Your end-client is not in a position to demand that you recharge your expenses without VAT. The basic principle of VAT is that it is borne by the end-consumer - ie Joe Bloggs the unregistered individual or unregistered business who ultimately consumes the goods.

              Try walking into PC World and refusing to pay VAT and see how far you get...

              You need to discuss this with your client and negotiate accordingly, but the only legitimate way that you can save them the VAT cost is to recharge less of the expenses - which would obviously leave you out of pocket.
              Why? If you pay £100 + VAT = £117.50. You reclaim the VAT so ultimate cost to the business is £100. You recharge the client £100 + VAT = £117.50 or the same as it would cost them to pay for it themselves anyway.
              This whole situation appears to make little sense anyway. If your end-client is paying (presumably) substantial fees to you as a VAT-registered trader, they would presumably be better served by being VAT-registered themselves.
              What if they make exempt supplies e.g. a bank?
              On a personal level, you should bear in mind that you are employed by your own company, not by your end-client. That could perhaps lead to the Inland Revenue treating the expenses as being taxable, because they would not have been incurred in the course of performing the duties of your employment - because you are not employed by the end-client.

              You personally incur the expenses in the course of your employment with your own limited company, which in turn reimburses you and in itself incurs those costs in the course of fulfilling it's contract with the end-client.
              HMRC wouldn't deny an expenses claim on that basis.
              Your own company is VAT-registered and must therefore charge VAT on the expenses it recharges to the end-client. This is a basic premise of VAT. With very few exceptions (legal firms for instance do NOT need to charge VAT when recharging court costs), a VAT registered trader MUST charge VAT, even if the amount being charged was for an expense on which no VAT was incurred in the first place.

              This can actually result in what appears to be a double VAT charge. Say for instance you incurred a cost personally of £100 + VAT = £117.50. Your company should reimburse you for £117.50 and should recharge the end-client for £117.50 plus VAT = £138.06.

              In practice though, this apparent double VAT charge will not normally happen because the bulk of your expenses will presumably be for travel costs on which no VAT was incurred by you in the first place.
              Or you could just choose to charge the end client the net cost to you plus VAT; in your example £100 + £17.50 = £117.50. You reclaim the input VAT remember? There is no need to charge the £138.06 as it is all part of one supply. You can choose to fee your client less.
              Anyway, I digress...

              At the end of the day, these expenses should be recharged by your company, not you and your company is obliged to charge VAT accordingly.

              For you to keep on the straight and narrow AND avoid your end-client incurring the VAT cost, your company would need to recharge a lower expenses amount, which is hardly going to be your preferred option as it would obviously leave your company out of pocket.

              Time to sit down with your client methinks...
              You are not out of pocket! The first person in the chain merely reclaims the VAT

              Comment


                #8
                Originally posted by Bradley
                Why? If you pay £100 + VAT = £117.50. You reclaim the VAT so ultimate cost to the business is £100. You recharge the client £100 + VAT = £117.50 or the same as it would cost them to pay for it themselves anyway.
                What if they make exempt supplies e.g. a bank?
                HMRC wouldn't deny an expenses claim on that basis.
                Or you could just choose to charge the end client the net cost to you plus VAT; in your example £100 + £17.50 = £117.50. You reclaim the input VAT remember? There is no need to charge the £138.06 as it is all part of one supply. You can choose to fee your client less.

                You are not out of pocket! The first person in the chain merely reclaims the VAT
                Sorry, confusion reigns. We are actually both right in what we are saying but it all boils down to what is ultimately agreed with the end-client.

                If the agreement is to recharge the actual cost, then that actual cost is the gross cost, which in turn becomes a net amount on which VAT should be charged. The contractor company may indeed reclaim the VAT, but that does not alter the facts that the actual cost is the original gross amount.

                The point either way is that a VAT registered trader must charge VAT on whatever amounts he charges whether for sales or for expenses.

                Returning to the original example of £100 + VAT, the contractor company would indeed only have a net cost after VAT relief (unless in the Flat Rate Scheme) of £100, but if it only recharged a total of £100 because the end-client refused to pay the VAT, then the contractor company would be around £15 out of pocket, because it's net recharge would only be £85.10.

                The point I was making about HMRC is that you cannot incur employment expenses in an employment that does not actually exist. There is no employment with the end-client and so it follows that expenses incurred by the individual that he directly recharges to the end-client cannot truly be considered to be allowable employment expenses.

                I agree that common sense should be applied in the circumstance that the expenses are directly recharged by the individual to the end-client, but as someone who has dealt with many Section 9A enquiries over the years, I know that common sense does not always prevail.

                The IR35 point that was made previously is also very valid, as is the point about VAT evasion, although in practice a VAT Inspector would generally waive any charges and simply advise the contractor company to recharge the expenses properly in the future.

                Comment


                  #9
                  Its worth bearing in mind that the individuals that run the company are registered for VAT not the companies themselves.

                  Therefore I think you would have to charge the VAT in either circumstance.

                  I may be wrong

                  Comment


                    #10
                    Re:Confusion

                    Originally posted by Taxman
                    If the agreement is to recharge the actual cost, then that actual cost is the gross cost, which in turn becomes a net amount on which VAT should be charged. The contractor company may indeed reclaim the VAT, but that does not alter the facts that the actual cost is the original gross amount.
                    I'd have to disagree there. The actual cost is the cost after taking off the reclaimable VAT surely? I think I know what the client would say anyway ...
                    Originally posted by Taxman
                    Returning to the original example of £100 + VAT, the contractor company would indeed only have a net cost after VAT relief (unless in the Flat Rate Scheme) of £100, but if it only recharged a total of £100 because the end-client refused to pay the VAT, then the contractor company would be around £15 out of pocket, because it's net recharge would only be £85.10.
                    But isn't the alternative that you charge £117.50? I'm sorry but your argument doesn't make any sense.
                    Originally posted by Taxman
                    The point I was making about HMRC is that you cannot incur employment expenses in an employment that does not actually exist. There is no employment with the end-client and so it follows that expenses incurred by the individual that he directly recharges to the end-client cannot truly be considered to be allowable employment expenses.
                    Sorry but that's nonsense. The expenses are reclaimable because you're an employee of your own company and you've incurred them because of that employment.
                    Originally posted by Taxman
                    I agree that common sense should be applied in the circumstance that the expenses are directly recharged by the individual to the end-client, but as someone who has dealt with many Section 9A enquiries over the years, I know that common sense does not always prevail.
                    Sorry but the HMRC must see you as an easy target then!

                    Comment

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