Can employer reclaim VAT paid to PSCs? Can employer reclaim VAT paid to PSCs?
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  1. #1

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    Default Can employer reclaim VAT paid to PSCs?

    Apologies this has been asked already, I used the search but couldn't find what I was looking for.

    Background: I work in investment banking and was forced to take a PAYE contract earlier in the year. Just like everyone else, my rate has been reduced by the the employers cost of employment i.e. NIC and Levy.

    In the ltd days, what happened to the VAT that I charged my employer? The VAT never was a consideration when negotiating a rate. Are the costs of the VAT claimed back by the employers somehow?

    I spoke to a fellow contractor working in budgeting and he suggested that about 5% of the 20% can be recouped but wasn't sure how.

    Thanks in advance for your help.

  2. #2

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    It depends.

    In finance, typically VAT is not reclaimable. Under some circumstances, some of your VAT may be reclaimable if your costs can be wholly or partially apportioned to a business unit/function that make some VATable supplies.

    This was never really a factor in the old days of contracting, as everyone was subject to 20% VAT so there was no difference between individuals. I'm now seeing this bite a few people though - for example, I know a lot of people that moved to one particular finance client over the last year - most went as FTC, but one insisted on going via an Umbrella, and they were set up with rates that came out roughly equal in terms of take-home pay. The Umbrella-sourced contractor is now very visibly costing the client a lot more money than the FTCs, and is now under a lot of pressure to move to FTC as a result.
    Last edited by Amanensia; 23rd September 2020 at 06:37.

  3. #3

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    Thanks for explaining that.

    What's your suggestion on why the market consensus, at least in IB, seems to be that the contractor should be the one picking up the employer NIC etc.? Aren't the costs of that, theoretically, similar to the VAT? Or am I missing something?

    To avoid misunderstandings, the rates I am comparing is the PAYE day rate incl. holiday pay vs. the standard ltd rate i.e. the average rate I am paid for one day worked.
    Roughly speaking, a 700pd ltd rate has now become a 600pd PAYE rate. The 700 are subject to VAT, the 600 are subject to employer NIC etc. If VAT cannot be reclaimed, isn't ltd more expensive for the employer?
    Last edited by FaMan; 23rd September 2020 at 08:12.

  4. #4

    Prof Cunning @ Oxford Uni

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    Quote Originally Posted by FaMan View Post
    Thanks for explaining that.

    What's your suggestion on why the market consensus, at least in IB, seems to be that the contractor should be the one picking up the employer NIC etc.? Aren't the costs of that, theoretically, the same as the VAT?

    Or am I missing something?
    Employer NIC is not the same as VAT.

    You seem to jump from "employer" to "contractor" to "umbrella". It might be worth while looking at what you are and who you work for.

    And possibly have a chat with your accountant.
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  5. #5

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    Quote Originally Posted by FaMan View Post
    If VAT cannot be reclaimed, isn't ltd more expensive for the employer?
    Yep.

    It’s certainly not cost-neutral for the client to go from paying rate + VAT to paying lower-rate plus ERNI. I suspect the logic is partly that VAT is seen as a cost of doing business that just applies to most of their purchasing, and not particularly thought about. Another factor might be that once they are paying PAYE it’s much easier to compare costs with other employees.

    I’ve taken a FTC (PAYE) role, but the salary was worked out explicitly by calculating the theoretical take-home pay for a given daily contract rate, and then backsolving for the salary that gave the same take-home, after taking into account us having to pay our own travel, hotels etc. It took quite a lot of negotiating to get to that point, and probably only worked as there were a dozen or so of us involved, in a crucial regulatory project. and all happy to walk if the offer didn’t work out. The client is still saving compared to LTD, as you say, albeit not an enormous amount in percentage terms. And we’re saving as there are no travel or hotel bills for the foreseeable future!
    Last edited by Amanensia; 23rd September 2020 at 09:18.

  6. #6

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    Trying to understand the point you're trying to get to. Are you aiming to use VAT as a negotiating angle for a better rate?

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    Quote Originally Posted by ladymuck View Post
    Trying to understand the point you're trying to get to. Are you aiming to use VAT as a negotiating angle for a better rate?
    Be good to understand if that is a valid argument? Do you have any thoughts why that might/might not work?

    Ever since those @#€&*! cut my rate by 13% and forced me to abandon my ltd company (I know, I know I didn't have to take the offer...., trust me, I tried to find another role), I was wondering why the VAT saving was never a consideration and why the big banks (in my case) get away with charging the contractor for their NIC costs etc. but I was never charged for their VAT costs.

    Our whole team is staffed with contractors and, as you can imagine, we kept discussing the issue of rate cut / PAYE etc but not once has anyone mentioned the VAT.

    I wanted to understand why that is.
    Last edited by FaMan; 23rd September 2020 at 18:23. Reason: Grammar

  8. #8

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    Quote Originally Posted by FaMan View Post
    Be good to understand if that is a valid argument? Do you have any thoughts why that might/might not work?

    Ever since those @#€&*! cut my rate by 13% and forced me to abandon my ltd company (I know, I know I didn't have to take the offer...., trust me, I tried to find another role), I was wondering why the VAT saving was never a consideration and why the big banks (in my case) get away with charging the contractor for their NIC costs etc. but I was never charged for their VAT costs.

    Our whole team is staffed with contractors and, as you can imagine, we kept discussing the issue of rate cut / PAYE etc but not once has anyone mentioned the VAT.

    I wanted to understand why that is.
    It's an argument - but I can't see it doing anything beyond being laughed out.

    And in the current market I suspect asking for a pay rise will simply mark your name as the first person to be out the door.
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    Quote Originally Posted by FaMan View Post
    Be good to understand if that is a valid argument? Do you have any thoughts why that might/might not work?

    Ever since those @#€&*! cut my rate by 13% and forced me to abandon my ltd company (I know, I know I didn't have to take the offer...., trust me, I tried to find another role), I was wondering why the VAT saving was never a consideration and why the big banks (in my case) get away with charging the contractor for their NIC costs etc. but I was never charged for their VAT costs.

    Our whole team is staffed with contractors and, as you can imagine, we kept discussing the issue of rate cut / PAYE etc but not once has anyone mentioned the VAT.

    I wanted to understand why that is.

    no one forced you to abandon anything. you are a free person like everyone else. VAT depends on a simple factor. Do they charge VAT to their clients? Banks typically dont unless they have advisory arms.

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