Payment of out of pocket expenses by client

[SarahL2012]

Found out yesterday that my current client's parent company (a very BigCo) insists that all contractors use its Expenses system for payment of out of pocket expenses such as mileage, train fares etc. So they follow exactly the same policy as the employees and their expenses are processed in exactly the same way.

Because BigCo is partially exempt for VAT purposes it obviously benefits from paying contractors directly because they don't have to add VAT onto their expenses when they send in their invoices.

Even leaving aside the IR35 implications to the contractors I'm presuming that if HMRC thinks VAT should have been charged by the contractor to BigCo then they could chase the contractor for that money.

It doesn't affect me because I'm in a different part of the company, but has anyone else come across this? Is it common practice????

[malvolio]

Found out yesterday that my current client's parent company (a very BigCo) insists that all contractors use its Expenses system for payment of out of pocket expenses such as mileage, train fares etc. So they follow exactly the same policy as the employees and their expenses are processed in exactly the same way.

Because BigCo is partially exempt for VAT purposes it obviously benefits from paying contractors directly because they don't have to add VAT onto their expenses when they send in their invoices.

Even leaving aside the IR35 implications to the contractors I'm presuming that if HMRC thinks VAT should have been charged by the contractor to BigCo then they could chase the contractor for that money.

It doesn't affect me because I'm in a different part of the company, but has anyone else come across this? Is it common practice????

The contract is between YourCo and the Agency and then to the Client. If expenses are claimable as part of the delivery of the services, the worker takes them from HisCo, who in turn invoices the client (via the agency), adding compulsory VAT if they are VAT registered.

So where do personal expenses come into that equation?

However, while it's not reallya good idea to be too close to the clients' Human Remains services, it's not really an issue to do it directly as long as it applies to everyone ( so is not a differentiator between contractor and employee) and as long as there are other more relevant indicators for IR35 status. All the worker is really doing is getting HisCo to avoid the admin cost of managing the worker's business expenses. And if VAT is due and should have been charged, whic is debatable, it's BigCo that gets to pay the fines since they are preventing it happening.

[Project Monkey]

Yes, they do it at that big white building in Swindon. Since these are personal expenses incurred on behalf of the client (i.e. not MyCo expenses), I don't see a problem.

[Sockpuppet]

Yes, they do it at that big white building in Swindon. Since these are personal expenses incurred on behalf of the client (i.e. not MyCo expenses), I don't see a problem.

An employee of your co is incurring these expenses in the normal course of their employment so they are Your Co expenses.

[Wanderer]

An employee of your co is incurring these expenses in the normal course of their employment so they are Your Co expenses.

What's wrong with the client reimbursing the worker directly for their expenses? Lots of clients do it like this. Keeps it simple too because the expenses don't have to go through your LTD

[SarahL2012]

What's wrong with the client reimbursing the worker directly for their expenses? Lots of clients do it like this. Keeps it simple too because the expenses don't have to go through your LTD

I checked on the website last night. Its wrong because HMRC has a whole section on what costs can be passed onto clients without VAT (disbursements) and what needs to be invoiced in the normal commercial manner.

"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."

HM Revenue & Customs: Costs passed on to clients - disbursements - and VAT

[Project Monkey]

I checked on the website last night. Its wrong because HMRC has a whole section on what costs can be passed onto clients without VAT (disbursements) and what needs to be invoiced in the normal commercial manner.

"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."

HM Revenue & Customs: Costs passed on to clients - disbursements - and VAT

Who said anything about excluding VAT? If the expense included VAT (e.g. a hotel), it would be passed onto the client directly. You can't add MyCo VAT on top of VAT already charged by the hotel.

[malvolio]

Who said anything about excluding VAT? If the expense included VAT (e.g. a hotel), it would be passed onto the client directly. You can't add MyCo VAT on top of VAT already charged by the hotel.

Yes you can. Arguably you should since it is a cost of YourCo providing your services, which is the core principle of how VAT works. However if you choose to reduce your chargebale costs to offset the VAT element, that's up to you. It is cost neutral anyway, unless your end client is not able to recover the VAT.

However we are talking about money paid out from your own pocket. How you get it back and from whom isn't really that relevant, as long as you get it back.

[mudskipper]

Dunno whether HMRC would agree with me, but in my simple world I'm happy for clientCo to book and pay for a plane ticket / hotel directly for myCo's representative (me), but if I'm 'on expenses' then they get reimbursed via myCo and invoiced back to client (with VAT). Don't know how far I'd argue the toss in OPs situation, but it doesn't sound right.

[TheFaQQer]

Dunno whether HMRC would agree with me, but in my simple world I'm happy for clientCo to book and pay for a plane ticket / hotel directly for myCo's representative (me), but if I'm 'on expenses' then they get reimbursed via myCo and invoiced back to client (with VAT). Don't know how far I'd argue the toss in OPs situation, but it doesn't sound right.

That's how I do it at the moment - client pays for the flight, I pay for the rest. I claim my personal expenses from MyCo, MyCo adds VAT and invoices the client.

In the OPs situation - what happens when the expenses are paid directly out of the company bank account?