I am getting in a right pickle with the following situation....Any help much appreciated!!
So - I have a client who's an interior designer. She is thinking of going VAT registered, (she's not quite at the threshold yet, but a couple more big jobs will push her over; and apparently suppliers will give better discounts to designers if you are VAT registered?)
She bills consultancy by the day, so no problem there with adding VAT to her bills. BUT, she also gets in lump sums of money from clients, to buy good on their behalf. (Soft furnishings, paint, sometimes furniture etc.) At the moment she keeps a record of what the customer has given her, what she has purchased for them, (at a trade discount price.) She then adds a 10% 'finders fee' to this, and keeps a tally until such time as the cash from the client runs out, when they top it up, or the job ends.
At the moment I am doing basic bookkeeping for her. I log the income as either Consultancy or Customer Cash Advances, and the Expenses under the usual headings, plus one for the items purchased on behalf of customers. When a job is completed, the net between the Cash Advance and Customer Purchases is her small mark up margin.
But what happens when/if she becomes VAT registered? She can claim the Purchase VAT back from the suppliers she buys from, as they will be billing her, not the client. But do I take 20% for Sales VAT on the 'Advance' made by the client? Or can the items she buys on behalf of her clients be classed as disbursements? And what about the 10% mark up she adds to the price she has paid for each thing?
The more I think about this, the more it is giving me a headache! Am I just over thinking this, or is it going to be really complicated to operate? She is not great with figures/spreadsheets anyway, so I can see things going pear shaped here!
Advice form anyone who has experience in dealing with interior designers who operate like this will be much appreciated!
Two issues to address:
- what is the contract between the Client and her customers? Have they agreed that she is acting as agent in purchasing those goods? Is there anything in writing to demonstrate it? The arrangement you describe suggests she is acting as principle for the goods as well.
- what would HMRC think? Unless you can make a case otherwise, they will think she is supplying her professional services AND sourcing goods for the Client. Therefore her turnover will include both.
Since the goods bear VAT when she buys them, she has to pass VAT onto her customers whether or not she is registered. It seems registration will not be a problem, and perhaps the Flat Rate Scheme, but do your sums first! Claim input tax on the goods, and obviously charge it on to customers.
