Umbrella companies and VAT on billable expenses

[alext]

Right - where do I start as this is a complicated one and one we have issues with from time to time with agencies...

So the normal scenario; the contractor submits the chargeable expenses to us, including the VAT (if applicable), assuming they can provide the VAT Receipt. We then raise the invoice and add VAT to the expenses (as they do not qualify for disbursements). This way when we receive the funds from the agency, we can pay the contractor in full (inc VAT) as they would expect> The VAT on the invoice is reclaimable then down the chain.

However, this can cause problems with some agencies and end clients who do not want to pay essentially VAT on VAT...

So the only way for a brolly to not add VAT to the invoice, is to add the full expense (inc VAT) and then not to apply VAT to that element of the invoice.

The VAT will then have to be paid back to the contractor out of the brollies pocket, and assuming they have the VAT receipt, the brolly will then be able to reclaim the VAT (albeit waiting until the end of the quarter to recoup this). Obviously if this amounts to substantial amounts then it is unlikely to be sustainable for the brolly.

HTHs and I haven't bored you all to tears with VAT talk

Thanks for the response but I'm also a little confused. In the last example, does that mean that the contractor is out of pocket and is there any rules to say that this should be the case? It seems wrong that a contractor is out of pocket because of essentially doing their job

[TheFaQQer]

I'd be grateful to find agencies / clients that will pay all my expenses

[lucyclarityumbrella]

Thanks for the response but I'm also a little confused. In the last example, does that mean that the contractor is out of pocket and is there any rules to say that this should be the case? It seems wrong that a contractor is out of pocket because of essentially doing their job

The contractor is not out of pocket because the brolly will pay the contractor the full amount inc VAT for the expense, the brolly remains out of pocket until they can reclaim the VAT they have paid the contractor at the end of the quarter, but as I said the contractor will have to provide full VAT receipts to the brolly in order for this to happen.

[lucyclarityumbrella]

Sorry Lucy if I’m missing something.

Sorry this is really difficult to explain and according to our auditors, can be operated in either way as long as this is consistent and there is no double reclaiming from the original receipt.

So in your example;

OPTION 1 (Brolly must wait until end of the quarter to reclaim VAT and pays out to the contractor in advance of reclaiming, brolly claims the VAT from original receipt):
Employee claims £120 inc. VAT
Umbrella, as the employer CHARGES INVOICE AS £100 + VAT and is entitled to reclaim the £20 VAT from the initial claim - ONLY IF CONTRACTOR CAN PROVIDE THE ORIGINAL VAT RECEIPT DIRECT TO THE BROLLY (Some end clients request this, in which case the brolly cannot reclaim and are unlikely to pay the VAT to the contractor)
Umbrella invoices £100 + VAT to the agency (agency cannot reclaim any VAT)
Agency invoices £100 + VAT to the client (client cannot reclaim any VAT)

OPTION 2 (Contractor is paid in full and the chain reclaim the input tax on the invoices, end client reclaims the VAT from the original receipt)
Employee claims £120 inc. VAT
Umbrella, charges agency at £144.00 (£120+VAT) - INPUT TAX - AGENCY CAN CLAIM THE £24.00 VAT BACK FROM THE INVOICE
Agency invoices £172.80 (£144 + VAT) to the client - AGENCY AND END CLIENT CAN RECLAIM £32.80 VAT AMOUNT - PLEASE NOTE THE AGENCY MAY CHOOSE TO OPERATE AS ABOVE AND NOT ADD INPUT TAX AT THIS POINT. END CLIENT IS ALSO IN RECEIPT OF THE ORIGINAL RECEIPT AND CAN CLAIM THE ORIGINAL £20 BACK.

[Lance]

Umbrella companies and VAT on billable expenses

Good god. So an Umbrella cannot operate VAT as VAT is mean to work. I’m glad I am LTD. When I was FRS I lost out like this, but it was offset by the FRS profit.

The message to the OP then is to use shabby B&Bs that aren’t VAT registered, or suck it up.

Thanks Lucy for taking the time to explain.

[lucyclarityumbrella]

Not a problem