VAT in PAYE/IR35 VAT in PAYE/IR35
Posts 1 to 10 of 10
  1. #1

    Still gathering requirements...


    Join Date
    Nov 2013
    Posts
    46

    Default VAT in PAYE/IR35

    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??
    Last edited by K12AN; 9th October 2019 at 12:29.

  2. #2

    Double Godlike!

    malvolio's Avatar
    Join Date
    Jul 2005
    Location
    Walking in the garden, dreaming of Olivia...
    Posts
    11,337

    Default

    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...
    Blog? What blog...?

  3. #3

    Nice But Dim

    DaveB's Avatar
    Join Date
    Oct 2005
    Posts
    19,965

    Default

    Quote Originally Posted by K12AN View Post
    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.
    "Being nice costs nothing and sometimes gets you extra bacon" - Pondlife.

  4. #4

    Nervous Newbie


    Join Date
    Sep 2019
    Posts
    2

    Default

    Quote Originally Posted by K12AN View Post
    Banks currently pay VAT on contractors invoices, but aren't able to claim it back.
    Quote Originally Posted by DaveB View Post
    Bank Pays agency and reclaims VAT
    In would appear that you are working on different assumptions.

  5. #5

    Super poster

    ladymuck's Avatar
    Join Date
    Sep 2005
    Location
    London
    Posts
    3,385

    Default

    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.

  6. #6

    Still gathering requirements...


    Join Date
    Oct 2019
    Posts
    20

    Default

    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.

  7. #7

    Nervous Newbie


    Join Date
    Jul 2014
    Posts
    11

    Default

    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.

  8. #8

    Super poster


    Join Date
    Apr 2015
    Posts
    2,354

    Default

    Quote Originally Posted by xar18 View Post
    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.

  9. #9

    Super poster


    Join Date
    Dec 2014
    Location
    WTT Consulting Ltd - London and online
    Posts
    3,168

    Default

    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.
    Best Forum Adviser & Forum Personality of the Year 2018.

    (No, me neither).

  10. #10

    Should post faster


    Join Date
    Jul 2019
    Posts
    173

    Default

    Quote Originally Posted by webberg View Post
    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?

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •