VAT in PAYE/IR35

[K12AN]

Hi all

Apologies if I mistake terminology etc. in the below, but wanted to check my understanding.
Banks currently pay VAT on contractors invoices, but aren't able to claim it back. So for a contractor earning £500pd, HMRC receive £100 in VAT.
If this contractor is now forced to operate via a PAYE solution, there is no longer VAT payable by the bank... so HMRC lose £100 a day in VAT?
On top of that, they miss out on the corporation tax paid by the limited co?
All this in an attempt to force the contractor into a significantly lower paid "employment" and increase their revenue?
Have they done their sums??

[malvolio]

Apart from the minor detail that VAT is never part of your income, the agency and/or the umbrella will be charging VAT themselves for their services to the end client. So if anything, the total amount may actually go up slightly with the additional fees...

[DaveB]

Hi all

Apologies if I mistake terminology etc. in the below, but wanted to check my understanding.
Banks currently pay VAT on contractors invoices, but aren't able to claim it back. So for a contractor earning £500pd, HMRC receive £100 in VAT.
If this contractor is now forced to operate via a PAYE solution, there is no longer VAT payable by the bank... so HMRC lose £100 a day in VAT?
On top of that, they miss out on the corporation tax paid by the limited co?
All this in an attempt to force the contractor into a significantly lower paid "employment" and increase their revenue?
Have they done their sums??

The banks don't pay VAT to contractors, their agencies do.

Now:
Contractor invoices agency + VAT, agency invoices Bank+Margin+VAT, Bank Pays agency and reclaims VAT, agency pays contractor and reclaims VAT, Contractor pays VAT to HMRC.

Under IR35 the contractor will no longer invoice the agency as it's all done on payroll, assuming the agency have their own brolly. Agency then invoices Bank+Margin+VAT,Bank Pays agency and reclaims VAT, Agency pays VAT to HMRC.

[CuriousIan]

Banks currently pay VAT on contractors invoices, but aren't able to claim it back.

Bank Pays agency and reclaims VAT

In would appear that you are working on different assumptions.

[ladymuck]

Banks cannot reclaim VAT if the supplied goods are part of a VAT exempt service they provide. If they provide a VAT-able service, they can reclaim the VAT on any VAT incurring costs which relate to that service.

It's too simplistic to say that banks cannot reclaim the VAT charged to them from using a contractor and it's highly likely they have a reasonbly large team making sure that if they can reclaim the VAT, they will.

[Amanensia]

It's true(ish) that in general banks and insurance companies won't be able to reclaim the VAT on contractor invoices. However not all contractors work at such clients and it would be difficult to justify having different IR35 regimes depending on whether HMRC happens to be getting a nice VAT windfall. Additionally it seems very likely that most banks etc will be pushing contractors to an "external" PAYE (ie umbrella), where VAT still applies, rather than operating their own PAYE system, where it wouldn't.

On the face of it it's very odd that banks would rather pay via an umbrella (and pay an extra 20%) rather than via their own payroll. The only explanation that jumps out to me is that running things through their own payroll would mean all kinds of internal political problems regarding salary bands etc - managers don't like seeing underlings (contractors) getting paid a huge salary. It's easier to rationalise away a large day rate. And the day rate "purchase" probably goes through a different internal approvals process and is paid from a different budget than the internal PAYE option.

It's a crazy world we live in.

[xar18]

Contractors are a capital expense and can be written off against Corporation tax annually. PAYE direct is revenue expenditure and cannot be, so costs the bank more. Standard stuff for Business Case production.

[WordIsBond]

Contractors are a capital expense and can be written off against Corporation tax annually. PAYE direct is revenue expenditure and cannot be, so costs the bank more. Standard stuff for Business Case production.

[webberg]

A bank (and indeed most financial services companies) cannot recover VAT paid in full.

In theory they can apply a direct attribution model so that the VAT cost of a service to a customer that is VATable can be offset.

In practice, a large bank will have tens of thousands of transactions every day and accounting systems capable of allocating payments and receipts to achieve the above are either hopelessly complex or horrendously expensive.

Therefore most banks/finance houses have agreed a formula with HMRC in which a given percentage of VAT is recovered.

These formulas are themselves complex and are regularly audited by bank and HMRC.

However a bank spends a lot on VAT and even a small movement in recovery rate can be a significant amount of money.

So if a bank pays an agency £100 of VAT, they may recover only 3% or 4% of that.

HMRC keeps the balance.

The agency is largely neutral. It should remit VAT to HMRC only in respect of its margin, less costs incurred in acheiving that margin - directly.

Most contractor PSC's use a flat rate VAT scheme so there is no real reference to transactions earlier in the sequence.

[Paralytic]

Most contractor PSC's use a flat rate VAT scheme so there is no real reference to transactions earlier in the sequence.

Is that still the case, even with the changes to the FRS a year or two back?