Agent requires VAT stripping from expenses

[Bod]

This is an interesting one....

My current gig incurs expenses of approximately £2,700 per month.

My company can reclaim approximately £1,800 of this from the client.

Normally I would add VAT to the Gross total of expenses, but in this case, the agency requires that input VAT is stripped from the expenses before subsequently adding VAT when I invoice. Their argument being that otherwise I would be charging VAT on VAT.

The problem is that I'm on the FRS, so if I strip out the "input" VAT and I pay the "output" VAT to HMRC, I will lose out 11.49% of all expenses claimed.

e.g. Hotel costs MyCo £115 (inc), MyCo bills agent for £100+VAT. MyCo gets £115 and gives 11.5% (£13.22 FRS) of that to HMRC, retaining £101.78 - MyCo is down £13.22

I could come off the FRS - but then I have to do much more receipt work each month and I'd lose the FRS "bonus". Seems like a lose-lose situation.

Any thoughts ? Is it just the agents playing silly buggers ?

[Nixon Williams]

Sadly I am afraid to report that the agency can insist on this method, although in our experience this is rarely requested.

As you are on the Flat Rate VAT scheme, you would lose out, so you need to decide how much you will lose and factor in the hassle factor of leaving the FR VAT to make your choice.

Alan

[VectraMan]

I had this direct to a client, but they were happy to pay the VAT on top of the gross once I explained. But I think it's a bit of a grey area, and at the end of the day refunding the expenses is a private arrangement between you and the agent. There's no reason at all you couldn't agree to only get a refund 50% of the expense for example, and that would be nothing to do with the VAT man, so it's also nothing to do with the VAT man if they say they'll only refund the net amount.

And it's of no concern of theirs that you're on the FRS.

I guess if you have a contract, or other agreement that says they'll refund expenses in full you could take them to court and argue about exactly what "in full" means .

[Bod]

More info...... Just had an interesting chat with an advisor @ HMRC.

According to HMRC, this agent's request that I strip out input VAT is incorrect and contravenes the VAT rules. - Alan, interested to know why you believe that the agent is able to insist upon this arrangement?

HMRC stated that the VAT in this case cannot be treated as a disbursement because (I quote, VAT guide 700.25.1) :

You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:

1. (Yes) you acted as the agent of your client when you paid the third party
2. (No!) your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, telephone bills, postage, and other costs being treated as disbursements for VAT purposes)
3. (No!) your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client);
4. (Yes) your client authorised you to make the payment on their behalf;
5. (Yes) your client knew that the goods or services you paid for would be provided by a third party
6. (Yes) your outlay will be separately itemised when you invoice your client;
7. (Yes)you recover only the exact amount which you paid to the third party; and
the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

I went on to explain to the HMRC advisor, that not only is this (VAT stripping) the policy of the agency through which the contract is placed but also of the end client - which is a government agency. The HMRC chap was most amused when he heard this.

Now I have to convince both the agency and my HMG client that they're wrong !

The VAT guide goes on to give the following example :

25.1.3 Examples of supplies which cannot be treated as VAT disbursements
The following are examples of supplies which might, for accounting purposes, be charged or itemised separately, but which cannot be treated as disbursements for VAT purposes:

Example 3: A consultant is instructed by the client to fly to Scotland to perform some work.

VAT treatment: The consultant cannot treat the air fare as a disbursement for VAT purposes. The supply by the airline is a supply to the consultant, not to the client. The recovery of outlay by the consultant represents part of the overall value of the consultant’s supply of services to the client. The consultant must account for output tax on the full value of this supply.

[centurian]

More info...... Just had an interesting chat with an advisor @ HMRC.

According to HMRC, this agent's request that I strip out input VAT is incorrect and contravenes the VAT rules. - Alan, interested to know why you believe that the agent is able to insist upon this arrangement?

Diving in here... I guess it depends on what your contractural terms are.

If my plumber quotes me £100 + VAT and I'm not happy to pay the VAT, then I can't demand that he strip out the VAT - HMRC are quite right in that.

But I can demand that he charges me 15% less. VAT will still be paid, but effectively the plumber would be paying it out of his pocket, not adding it on. Of couse, he is under no obligation to accept the work.

From what you describe, ClientCo are not reimbursing you fully, but contributing to your costs. If Agent/ClientCo are simply stating that your VAT inclusive amount for costs is more than they are prepared to pay, then they have a right to ask for a reduction (which could co-incidentally be 15%), assuming your contract doesn't say otherwise.

[MPwannadecentincome]

I can't see how it matters to the agency, they get to claim that VAT back.

[Colourful Contractor]

I have previously queried this with my accountant and was advised that I 'have' to charge VAT on my expenses if I am invoicing them to the client via the agent, since I am VAT registered (via FRS). It makes no difference that they already have VAT charged when I incurred the expense, I need to add VAT on top.

My agency made a fuss to start with but have agreed, and as someone else said, it really shouldn't matter as they can claim as input tax anyway.

[malvolio]

You supply services to a client.

You are VAT registered

Therefore all services you supply, and all associated costs to you of supplying those services, are liable to have VAT applied at the current rate. This is not discretionary, them's the rules.

Your cost of sales will include a VAT element from other registered suppliers.

Adding VAT to VAT is cost neutral all they way up the chain until you reach someone who is not VAT registered.

FRS doesn't make any difference. Baically you charge VAT at 15% and pay at 11.5% (or whatever) of your total invoice value. You don't care that your costs include someone else's VAT charges.

Hence, your agency is talking bollicks.

[PhilAtBFCA]

Charging client expenses

Bod,

Thanks for the interesting question which has prompted me to remember to add an article onto our Knowledgebase for this as it is not covered.

I would like to add a couple of points for clarity hopefully:-

1. HMRC's advice

This appears to have been given on the basis of what you told HMRC, which means they may have been given the wrong information to advise upon.

Your stated list of 7 items that if applicable mean that you can treat the payment as a disbursement fail on two accounts according to your analysis, and therefore these payments are clearly not disbursements on behalf of your client.

Your first item in the list says you acted as the clients agent, I would consult your contract with the agency as many contracts specifically state that you will not act as the clients or staffing companies agent at all.

I also think that you should consider your IR35 position here.

Working on the bais that you are a Professional Contractor running on your own business, on an engagement where some expenses connected with the provision of your services are chargebale, I do not think it is in your benefit to attempt to be "acting on behalf" of your client in the purchasing of items ( expenses) in order to perform you contract, as far as IR35 is conecrned.

I am not saying, that this puts you inside IR35, but I am saying that within the general scheme of things, it is certainly not a helpful matter to put yourself in this position.

2. The Agency perspective

The agency has a completly legitimate right to ask you as a supplier to comply to certain ways of invoicing and also to your contract terms. they also have a legitmate concern like any business to minimise costs.

Lets say you spend £115 on something that includes VAT ( £100 net of vat )and you are billing the agency.

if you bill £115+15% vat = £132.25 then the net, after vat cost to the agency is £115

if you bill £100+15% vat=3115 then the net, after vat cost to the agency is £100

The agency is therefore interested in you billing £100+15 vat=£115 as it wil cost them less.

Adding VAT on VAT in this case is not cost neutral to the agency at all, one way is significantly cheaper to the agency, and they will want you to apply this method, whether they can do depends on their contract with you, IMHO not the VAT rules as either way is correct as far as VAT is concerned ( as long as its charged ).

If you are on standard vat then you dont care and you bill £100+vat=£115, as thats what it costs you anyway.

If you are on FRS then you realise that the "cost" appears to be £115 to you, as you cant claim the £15 vat back. This is true, but Not true ! On the FRS you lose on the expenses side but you gain on the sales side as instead of paying 15% vat on your sales you only pay 11% for instance ( or whatever % your company has agreed to use, it can vary)

So on FRS whether you are losing or not depends on whether you are gaining more on the sales than you are losing on the expenses.

It would seem to be clear and more comfortable in your circumstances if you seriously considered to come out of the FRS for this contract.

I hope that helps

Phil