Im in the process of starting a company that would amongst other things provide self-employed temporary staff to the construction industry. However Im a bit confused about how the VAT would work on this. I think the best way to put forward my question would be an example.
If i charge a firm £17p/hour for an employee and then paid him/her £14p/hour what would my VAT liabilities on this be? Do i pay VAT on my profit margin, the whole hourly rate I charge or none of it?
Any help would be much appreciated as Im trying top put together a business plan as we speak.
you mention that the temporary staff are self employed but don't state whether they are VAT registered. Lets take both scenarios.
you are making £17 per hour so your VAT (at 20%) would be £3.40. Total charge, £20.40 per hour.
For VAT registered self employed workers who pass you a proper VAT invoice you would pay £14 plus £2.80 vat so total payment from your company of £16.80.
The VAT paid to the self employed staff reduces your liability so for each hour worked your VAT to be passed to HMRC will be £3.40 - £2.80, so 60p.
For self employed workers who are not VAT registered you would charge the £20.40 as above but pass £14 to the worker and £3.40 to HMRC.
Either way you come out of the process with the same amount of money (£3). The only differentce is whether you pass the VAT money to the contractor who passes it to HMRC or whether you pass it to HMRC yourself.
At the end of the day when it comes to VAT we are just unpaid tax collectors.
Good luck with the new venture and hope that 2011 is a prosperous one for you.
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I agree with Shaun's advice. I do think you need to be aware of the possibilities of HMRC considering these workers as employed as opposed to self employed. The regulations, though flouted often, are quite clear in who can be considered self employed and cannot and just because someone is verified as a subcontractor does not mean they are self employed. Of course if they provide heavy machinery and employ others there is a good chance of them being considered self employed but do not take it for granted.
Also I had a client a few years ago who runs an agency and he used to have a lot of cis workers (self employed). He had a paye inspection and the inspector said he wasn't allowed to pay self employed workers under CIS as he was an agency. This was news to all of us and my client had actually met with the local inspector who was in charge of CIS for the area and he never knew about this rule. The inspection resulted in the client having to gross up all payments to account for PAYE and National Insurance which meant he had over half a million pounds to pay. After a couple of weeks of sleepless nights for all concerned hmrc agreed not to impose this but he now either employs directly or he has got the workers to trade via a limited company and for the company to register under CIS.
Maybe none of this scenario fits your business plan but just a bit of food for thought before you do anything you may later regret. The thing is many of the local tax inspectors didn't know this ruling and neither did any of the accountants I spoke to, so if you take advice that contradicts this, I suggest you get in writing from hmrc!
