I have a subcontractor who works at one of my offices. He is VAT registered and invoices us for travel expensese when he visits customer sites and we can then recharge these onto the customer. The problem is that the subby is charging VAT on VAT. For example he pays £120 for a hotel (£100 Net + £20 VAT) and is recharging me £144 (£120 Net plus £24 VAT).
For me he should be reclaiming the £20 VAT and then invoicing me £120 (£100 Net + £20 VAT) so his tax burden is zero as opposed to £4.
I have spoken to the VAT helpline and also 2 VAT officers who have visited here and they all said that subbys costs are a vatable charge and therefore what he is invoicing is okay. None of them seemed totally convincing though.
However I then re-invoice the £144 (£120 Net plus £24 VAT) onto my customer but he is asking for copy receipts (the subbys original receiptys and not his own invoice) and therefore see the value of £120. Now he is saying he will not pay this as VAT is charged on vat. In his shoes I would probably agree with him.
What is the correct treatment? I'm finding the VAT hepline / people extremely useless as its becoming so complicated I don't think they know themselves.
If it a reimbusrement of expenses then the subcontractor should invoice you the amount of £100 plus VAT.
You are correct in your appraisal of the scenario in that the subcontractor is taking the £120 as the cost rather than the £100 (they are wrong).
The way that they are claiming currently is as an extension of their revenue rather than a reimbursement of expenses.
HTH,
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 think HMRC would be happy with either treatment, they would probably say it is not up to them how much your subbie charges you, however it certainly is acceptable your preferred way and how Shaun describes it. I think you just need to tell your subbie that you are only going to pay it as a reimbursement, can't imagine he would want to upset you, his client, over such a small matter.
There is a small argument here for the purpose of "value added" tax. The subbie has incurred a cost as part of delivering the service to you, and all his costs go to add value to what he providing, because he couldn't provide the service without incurring that cost. If you couldn't claim VAT back, HMRC would actually lose out on the £4 income. However, as Rob says, HMRC probably wouldn't have an issue in this case, but be aware that if your subbie incurs say, a flight cost, which he wont pay VAT on, he has to charge VAT to you. Same goes for any recharge of a cost that doesn't carry VAT, and also mileage.
-- Edited by FoxAccountancyServices on Friday 18th of October 2013 09:02:31 AM
My point was just to give a little flip side perspective of why VAT was actually created. In providing the total service to the contractor, the subbie has incurred his own costs, (which actually backs up his status as self employed). The provision of that cost adds value to the job as a whole.. and if you look at it from HMRC's perspective, they actually lose out if he recharges it at net value, because it goes up the chain with no benefit to them. (It isn't called "labour added tax" after all)
However, as I've said, there would probably be no issue with him recharging the net value, and adding the VAT... it was just a way of looking at things. I cant see how HMRC could force the client to make a profit on the recharge of the hotel.
Your link shows...
What isn't a disbursement for VAT purposes
There are many incidental costs that your business might incur that you can't exclude from the VAT calculation when you invoice your customers. These could include travelling expenses and your own postage costs. They aren't treated as disbursements for VAT purposes.
There are two ways to circumvent the issue of the non vat expenses... the purchase invoices are raised in the contractors name, so that the subbie really is only getting a reimbursement. If the subbie is a limited company, they can provide expense claims to the contractor, as an individual. Adding them to the sales invoice as a recharge would result in them having to charge VAT. And from my understanding, the reason for that goes back to what I was saying about adding value.
-- Edited by FoxAccountancyServices on Friday 18th of October 2013 10:46:34 AM
My point was simply to examine what "value added" means, if you think about it. The subbie has sourced, booked and paid for the hotel. This allows him to provide the service, and so in theory, its given some value to the contract. My point really wasn't taken from the subbie point of view or the contractor point of view... it was from HMRC's point of view. They are taxing the added value as it goes from one person to the next, rising up the chain. I gave this explanation because the OP said
"I have spoken to the VAT helpline and also 2 VAT officers who have visited here and they all said that subbys costs are a vatable charge and therefore what he is invoicing is okay"
HMRC lose out on that when trader's split out the costs like this. Indeed, they don't allow you to recharge travel and postage without VAT on it, and that's so they can make the money from the added value of it being sourced and then passed along. That's how its been explain to me in the past, and I am wondering if that's the rationale behind the HMRC helpline and the 2 VAT officers that have told the OP that the subbie is doing things correctly. It might not be, I am just offering an idea
And then, of course, I am agreeing that, in practice, would HMRC be able to force the subbie to charge anymore than the £100 as the net figure, anyway?
I cant see a definitive example of recharging items that have had VAT claimed on them, on the HMRC website, and so I wouldnt want to go ahead without this explanation, as who knows what HMRC would say in an investigation, if they are advising that the subbie is dealing with it correctly already.
-- Edited by FoxAccountancyServices on Friday 18th of October 2013 02:13:08 PM
not actually true on the subbie having to charge VAT.
As indicated in my earlier post to process it that way it actually becomes revenue rather than reimbursement of expenses.
Using your example of a flight, where non vatable expenses are reimbursed to a VAT registered individual so no VAT was paid on the original expenditure then there is no VAT to be reimbursed so the invoice from the VAT registered business would exclude VAT.
Of course, thats only really useful where either there is no VAT on the expenditure or the one doing the reimbursing is not VAT registered.
Sure that there must be a handy HMRC link to distbursements somewhere, back in bit...
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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.
#1 the search that I used was "site:www.hmrc.gov.uk vat disbursements" and bless my little cotton socks the first entry was the one that I wanted.... Feels like todays going to be a good day.
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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.
Agreed Michelle, I always tell clients to add their mileage plus vat etc to a clients invoice as they can't do the job unless they are there. Also if they are on FLR they will end up paying vat and not claiming any. But absolutely if you are recharging mileage, train etc and you are vat registered you add the vat on your invoice.
As a bit of a side step, what's your take on the idea of the individual expense claim, if the subbie is operating a limited company? Would that cause IR35 issues, nowadays? Its been a long time since I was involved with a company who did that. Some years ago, my employer had a director whose company had contracts with several companies, which meant he had to travel a lot. As he booked flight with his personal credit card, he would submit expense claims in his own name, direct to the companies, which they paid to his personal account, keeping all transactions away from the company. He would send them the original invoices attached with his expense claim.
His limited company would then issue invoices for consultancy fees plus mileage, and added VAT to that.
I never questioned my employer about it, and I am wondering if it would have any implications?
My point was just to give a little flip side perspective of why VAT was actually created. In providing the total service to the contractor, the subbie has incurred his own costs, (which actually backs up his status as self employed).
Michelle,
I'm not sure about the point you're making. Are you saying that the subbie, whilst VAT registered, may NOT be recovering the VAT from HMRC in any way and that, therefore, the VAT is a "cost" to him?
I don't see any IR35 issues here (I'm not an expert by any stretch of the imagination), for a start we don't know whether the subbie has many different clients and therefore HMRC should see that as a legitimate trading company and I certainly think your director chap who dealt with many companies would not fall foul of IR35 legislation, but I am surprised that he submitted personal expense claims to the various companies for the flights, I would have thought that would only be allowable from a direct employee? I'm trying to figure out what benefit it afforded him to do it that way. I would have assumed an invoice to his company for the flights and then an invoice from his company (plus vat of course if applicable!!) would have the exact outcome and would be a neater solution. Perhaps I am missing something obvious here....again!
I think he did it to avoid charging VAT on the travel expenses, and to negate the worry that the invoices were in his personal name for any potential VAT reclaims. It may have also meant that he was covered for any entertaining expenses he incurred whilst on their dime. No doubt then, the company he passed his receipts onto were unable to gain CT relief, instead of him? It also made his records easier to keep, as he didn't need to process tons of little bills from all over the world through his bookkeeping. This allowed him to literally be reimbursed for expenses rather than recharge them - which I came to believe held a distinction. I walked into a situation that was already in place, so perhaps the company he was recharging had an issue with being charged VAT on top of non vat items. I have had this argument pass by my eyes a lot over the years, and there was one client who had a big row with a contractor over charging VAT on travel and mileage, and my boss was forced to issue a letter for him to explain that he had to! As you say, when dealing with a VAT registered company, it makes little difference... perhaps I was missing something obvious back then!!! LOL
Looking at Shamus's link to the HMRC guidance, here's what I make of it:
The subbie's actions fit with HMRC's definition of a recharge. He's charging VAT on the amounts he is invoicing to the contractor (because the hotel accommodation was supplied to him and not to the contractor), rather than treating them as disbursements. I expect that the subbie is named as the customer on the invoice - not the contractor. The subbie's remuneration agreement with the contractor is probably time plus expenses.
HMRC's guidance says:
If you had to charge VAT on items you paid for because they were supplied to you and not to your client, you can claim back any VAT you paid on them. It makes no difference whether or not you passed these costs on to your customers as recharges.
This means that the cost to the subbie is £100 (he gets the £20 back from HMRC) and that is all that can legitimately be recharged. The subbie's invoice to the contractor should include £100 recharged hotel costs plus the subbie's VAT charge thereon.
Finally, and controversially, I suspect that what might be happening here is that the ultimate client is being asked to pay an extra £24 - of which £4 will benefit HMRC (they'll end up with £24 instead of £20) and £20 will benefit the subbie!
This means that the cost to the subbie is £100 (he gets the £20 back from HMRC) and that is all that can legitimately be recharged.
I think the point is that he can legitimately charge whatever he wants as far as HMRC are concerned, however the contractor would obviously prefer to be charged the same as the subbie.
This means that the cost to the subbie is £100 (he gets the £20 back from HMRC) and that is all that can legitimately be recharged.
I think the point is that he can legitimately charge whatever he wants as far as HMRC are concerned, however the contractor would obviously prefer to be charged the same as the subbie.
Agreed that HMRC don't care what payment arrangements exist between the subbie and the contractor, but if the agreement between the subbie and the contractor is that the contractor will reimburse his necessarily incurred out of pocket expenses, does that not lock it down to £100? It does in my book.
Agreed too. I cant see that HMRC could force the subbie to charge the £120 plus the VAT, if he is happy to charge the £100+VAT. The only thing that I am unsure of, which just makes me step back a little, is why the 2 VAT inspectors that have visited the contractors premises, and the helpline, have not explained this, as I imagine that the contractor has explained what he wants from the situation... clearly, at least 3 times. And yet, however that conversation played out, it ended up in the contractor being told the subbie was doing things correctly. So I am worrying that there is something I am missing here.
I wasn't suggesting that the anyone was doing anything untoward.
I was actually coming to matters from the perspective of the one reimbusing the expense who is right to complain as they have agreed to reimburse the expense but then the subcontractor is making a profit on it turning reimbursement into revenue.
From the inspectors perspective no matter how it is treated everything is above board.
Its the contractor who is losing out in this so going back to the original question of that being the issue following the HMRC link route keeps everyone (except perhaps the subcontractor who will be down on the additional profit).
HMRC cannot complain because they should never have had the slightly increased yield on the transaction in the first place which was additional profit created by the subcontractor.
Simples.
__________________
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 haven't said I thought you were suggesting anyone was doing anything untoward? Sorry if that's whats come across to you, Sweet :)
My cause for pause is that when the inspectors have visited, it may be that the contractor showed them an invoice and pointed out what he expected, and what he actually got - that's what I would do, so there could be no misunderstanding. Both inspectors haven't confirmed to the contractor that it's ok for the subbie to charge £100 plus VAT. That seems strange to me, and would make me hesitant to give advice to the contrary. I cannot know what they saw, and what was said to them. So I instead offered an idea of why they might be happy to go along with what the subbie had invoiced, but then agreed that the subbie charging the £100 + VAT shouldn't be an issue, but warned the client not to expect no VAT on travel expenses.
You then sent a link and I felt you were gearing towards disbursements angle, but it clearly states that travel expenses are not disbursements. If I missed your point, or read the wrong thing, let me know.
It seems that either way, the contractor is looking for verification from the VAT office to settle this dispute, but it is one of contract. It will lie in the agreement between the contractor and the subbie. If the contractor has agreed to reimburse the cost "in full" then it could be deemed that VAT was included in that. It's also possible the subbie based his labour charge on the amount he would receive as a whole. We cant assume otherwise, even it would seem straight forward to. Plus, the contractor shouldn't have to pass on any more than the subbie's invoice to their customer, to be fair. Not all the subbies receipts. That seems to be what has prompted the issue.
