Help VAT and invoicing EU clients with UK sub-contractors

[Purposeful Change]

Hello.

I am so confused and am hoping someone can help me here.

I have a Scandinavian client to whom I am suppling services. I am personally delivering to them and I have 3 associates I have built into the team.

So here is my challenge:

The client is quite tight on the margins I charge as we have to be fully visible but being new to this I haven't got a clue what to do.

So for example purposes I will use made up numbers and hopefully someone can understand what I don't understand.

So I am on the Flat Rate for VAT and given much of my work is in the EU that seems to work when we look at my expenses to date but now things are changing.

I charge the client 2 and because they are EU VAT registered I bill them 2 + my expenses. No VAT as they are outside the UK.

No problem there.

I have 3 contractors:

Contractor A charges me 1.7 and I bill the client 2.3. However because he is UK VAT registered he actually bills me 1.7 + VAT = 1.94 which eats into my margin.

Contractor B and C charge me 2 and I bill the client 2.6. However because of the same they actually bill me 2 + VAT = 2.4 which kills my margin.

Because I am on the flat rate I cannot reclaim the VAT on this type of service

So what do I do here? I have written into my SoW that all costs are exclusive of VAT but I don't think I can pass this cost on...

Any help?

[TheCyclingProgrammer]

Ok, a few points:

1. As you say because the client is a business in the EU the reverse charge rules apply and you do not charge them VAT.

2. Your margin is 0.6 on top of the net price your sub-contractors charge.

The problem here is that you cannot reclaim the input VAT charged by your subbies therefore you really ought to be treating their gross fees as your costs and adding your margin on top of that.

However I'm guessing whatever you've negotiated with the client means you cannot do that therefore you have to absorb the VAT cost and it is killing your margin.

You have two options:

1. Re-negotiate with the client and increase your fee so that it your margin is added on top of the gross fee charged by the subs.

2. Deregister from the FRS.

Currently on the FRS you pay less VAT to HMRC than you charge and this surplus amount is designed to cover your VAT costs. However your VAT costs are higher than most as you are paying sub-contractors. This is also compounded by the fact that your supplies outside the U.K. are not included in your flat rate turnover so you're making no surplus there at all.

Considering the forthcoming changes to the FRS and your current situation it would seem advisable to me that you come off the FRS.

[Patrick@Intouch]

It sounds to me like you should be on the standard scheme for VAT.

As the majority of your turnover is from providing services to EU clients then there is no or little benefit to you under the flat rate scheme.

On top of this you are paying UK, VAT registered sub-contractors and cannot claim the VAT back on these costs.

Have you also considered the changes to the flat rate scheme coming into effect from April 2017 whereby you may have to apply a rate of 16.5% to your gross turnover?