VAT on Expenses for Non VAT registered Contractor

[kerrygibson]

I'm a contractor with a Limited Company. My expenses are paid by the client on a self-billing basis. The company that contract me through to my client haven't paid me the VAT element of the expenses and have given me this explanation :



In the example for the VAT registered contractor, the total VAT in the chain is £380. Client pays the company £380 of VAT of which the company pays the HMRC £40 and pays the contractor £340. The contractor pays the HMRC £300 and the hotel £20 leaving the hotel t pay HMRC the remaining £20.



In the case of a non-VAT Registered contractor, the total VAT in the chain remains as before at £380 because the invoice from Company to Client is the same. However because there is no VAT on the invoice from the contractor, company has to pay the whole of the £380 to HMRC. Because the non-VAT registered contactor effectively breaks the VAT chain, there is no VAT between the hotel and company for the £20 VAT to be passed on.

The overall effect is that is in this example (and obviously it will change depending on the numbers and proportion of expenses versus labour), the VAT registered contractor has made £1500 profit but has had to fill in VAT returns and pay HMRC and the non-VAT registered contractors has paid the hotel £20 VAT that they cannot claim back

I've also got a spreadsheet I can email

Thanks for any help

[northernladuk]

Why not have a read of the thread below and associated links that is currently running at the moment...

http://forums.contractoruk.com/busin...-question.html

[Martin at NixonWilliams]

That example above makes very little sense to me.

If you incur expenses which you are able to charge back to your agency or end client, you should invoice for the gross amount plus VAT. There is often an issue with agencies saying that you should charge VAT on the amount of expenses including VAT, this is incorrect as it does not serve the purpose of reimbursing the contractor, but it is becoming more and more common.

The idea is that the contractor will be no worse off as they can reclaim any VAT already incurred on the expenses being charged, but this is rarely the case due to most contractors operating the flat rate scheme, whereby they cannot reclaim VAT on expenses - Following the method prescribed by many agencies, many contractors are therefore not fully reimbursed and often lose out financially.

Having said the above, the agency is unlikely to budge and it is probably worth suffering the cost rather than risking the relationship you have with your client.

I hope this helps.

Martin

[TheCyclingProgrammer]

If you incur expenses which you are able to charge back to your agency or end client, you should invoice for the gross amount plus VAT. There is often an issue with agencies saying that you should charge VAT on the amount of expenses including VAT, this is incorrect as it does not serve the purpose of reimbursing the contractor, but it is becoming more and more common.

Isn't it a matter of contractual arrangement whether or not expenses are re-billed for the gross amount or net of VAT? I appreciate that in an ideal world, the gross should be re-billed as that's the cost incurred by ContractorCo (irrespective of whether they can or cannot reclaim the input VAT) but if the agency wants to stipulate that expenses are re-billed net of VAT, that is their choice.

It does make you wonder how they treat expenses that were zero rated or exempt though...clearly in this case VAT should still be added to the total amount as the service from ContractorCo to agency is not zero rated/exempt. I bet loads of agencies get this wrong.

The idea is that the contractor will be no worse off as they can reclaim any VAT already incurred on the expenses being charged, but this is rarely the case due to most contractors operating the flat rate scheme, whereby they cannot reclaim VAT on expenses - Following the method prescribed by many agencies, many contractors are therefore not fully reimbursed and often lose out financially.

I agree that if the contractor is not VAT registered, they are going to be out of pocket if the agency insists on them not re-billing the expense at the gross cost. But on the FRS, your FRS surplus should generally cover your input VAT so I don't think its entirely accurate to say you lose out financially (you should still be making a net profit from the FRS after accounting for your irrecoverable input VAT and if you're not, you shouldn't be on the FRS).

[Contreras]

Isn't it a matter of contractual arrangement whether or not expenses are re-billed for the gross amount or net of VAT?

Yes, it is.

HTH

[Martin at NixonWilliams]

Isn't it a matter of contractual arrangement whether or not expenses are re-billed for the gross amount or net of VAT? I appreciate that in an ideal world, the gross should be re-billed as that's the cost incurred by ContractorCo (irrespective of whether they can or cannot reclaim the input VAT) but if the agency wants to stipulate that expenses are re-billed net of VAT, that is their choice.

In all honesty, I am not entirely sure as I don't see all that many contracts but the ones I have seen only ever mention VAT in terms of the daily rate, e.g. 'ContractorCo will be paid £X per day excluding VAT'. I have not seen the VAT position made clear in the contract in terms of expenses, do you have your own experience of this that you can share?

I agree that if the contractor is not VAT registered, they are going to be out of pocket if the agency insists on them not re-billing the expense at the gross cost. But on the FRS, your FRS surplus should generally cover your input VAT so I don't think its entirely accurate to say you lose out financially (you should still be making a net profit from the FRS after accounting for your irrecoverable input VAT and if you're not, you shouldn't be on the FRS).

By saying that the contractor may lose out financially, I mean the contractor is effectively suffering a share of the agencies cost. I am not saying this would outweigh the FRS benefit, although it may well do.

Even if this cost does outweigh the FRS benefit, you should not necessarily deregister from the scheme automatically unless you are confident this will apply for 12 months, as you cannot rejoin the scheme for 12 months once deregistered.

[TheCyclingProgrammer]

In all honesty, I am not entirely sure as I don't see all that many contracts but the ones I have seen only ever mention VAT in terms of the daily rate, e.g. 'ContractorCo will be paid £X per day excluding VAT'. I have not seen the VAT position made clear in the contract in terms of expenses, do you have your own experience of this that you can share?

None personally, but there have been plenty of people on here that have mentioned that their agency has insisted on reimbursing expenses net of the original input VAT.

By saying that the contractor may lose out financially, I mean the contractor is effectively suffering a share of the agencies cost. I am not saying this would outweigh the FRS benefit, although it may well do.

Even if this cost does outweigh the FRS benefit, you should not necessarily deregister from the scheme automatically unless you are confident this will apply for 12 months, as you cannot rejoin the scheme for 12 months once deregistered.

I prefer to look at it as the agency asking for a discount to the value of the original input VAT. Some of them also seem to think that doing it any other way would be paying "VAT on VAT" which is of course nonsense. If the original expense was zero rated or exempt, we would still charge VAT on the recharge yet that point seems to be lost on them.

Good point re: FRS - my own view is that generally speaking, if you're being paid a decent rate and your expenses aren't too great, that most contractors would still find the FRS profitable even after accounting for expenses reimbursed at net cost rather than gross, but it's definitely something to keep an eye on.

A lot of people fall into the trap of seeing FRS surplus as "free money" or "extra profit" instead of correctly deducting their irrecoverable input VAT first, to establish the true profit from the scheme.