Ltd Co Expenses VAT query with agency

[Sausage Surprise]

Something I kept from a previous discussion on this some time ago......


Since you are VAT registered you are required to charge VAT on all invoices to your clients (in this case, the agency). The VAT you have already paid in your expenses is part of your cost of sales, so it is entirely legitimate that you add VAT to it - the underlying logic is that you have "added value" by performing the service itself, hence the tax is due. It is a myth that you are charging VAT on VAT, that doesn't actually matter at all. Nor is it a cost you your agency, since they will recover any VAT they pay out from their own clients.

By removing the VAT element the agency is effectively reducing their own tax bill at your expense. Hence, fraudulent behaviour.

This is all spelt out on the HMRC website (somewhere!!) and in Tolleys and in accepted practice. However, looking at the end-to-end transaction chain the nett VAT actually paid to HMRC works out the same, so they don't really care either way, it's only you that is losing money. You should speak to your own accountant for the official argument.

[aoxomoxoa]

The VAT you have already paid in your expenses is part of your cost of sales, so it is entirely legitimate that you add VAT to it - the underlying logic is that you have "added value" by performing the service itself, hence the tax is due.

I agree. My understanding is that the only time you wouldn't add VAT on your invoice to ClientCo is for disbursements, i.e. things you've bought on behalf of the client, such as hardware.

[Bunk]

I think in reality, they're not refusing to pay VAT on the expense. You're VAT registered so you have to charge VAT on everything, there's no getting around that. What they're effectively doing is only agreeing to pay 80% of the cost of the expense.

It depends if they're doing it because they think it's the correct way to do it or they're being tight, but it could be tough getting them to change their mind if their accountants think they're doing it correctly. When I've billed expenses in the past I've always added VAT on top (of the VAT inclusive price which I paid) and the client hasn't had a problem with it.

[Contreras]

I think in reality, they're not refusing to pay VAT on the expense. You're VAT registered so you have to charge VAT on everything, there's no getting around that. What they're effectively doing is only agreeing to pay 80% of the cost of the expense.

It depends if they're doing it because they think it's the correct way to do it or they're being tight, but it could be tough getting them to change their mind if their accountants think they're doing it correctly. When I've billed expenses in the past I've always added VAT on top (of the VAT inclusive price which I paid) and the client hasn't had a problem with it.

The agency have it wrong because they are drawing a distinction depending on whether on not the item was originally vattable and they are implying that the reason is due to VAT rules (and therefore non-negotiable).

They can of course stipulate whatever they like as the contract terms. You can of course attempt to negotiate on any of the terms. There's nothing wrong with making a profit or loss on expenses, that's just business.

And you're still making a (albeit reduced) profit overall on the contract. It's no different to say doing an extra half hour and not billing for it, which most people would not consider as being "out of pocket" (although I know some who would!).

It's also not quite the 20% hit you might think. It actually works out as 11.6% on the original gross expense after accounting for FRS and CT.

Cost £83.33 + VAT = £100.
Recharged £83.33 + VAT = £100.
VAT paid to HMRC, £100 * 14.5% = £14.50
P/L before tax, £100 - £100 - £14.50 = -£14.50
Net P/L, -£14.50 - 20% = -£11.60.

[diesel]

Me neither. You are right and they are wrong, but getting them to understand that is going to be nigh on impossible.

Tell them that you have spoken to HMRC about it via their helpline, and the only thing that you can suggest is that the client arranges everything themselves, or you don't do anything which incurs expenses.

I told them that my accountant has advised me that I am acting correctly and will have to process my invoices in a different manner, but will advise if this issue escalates after taking HMRC advice. Not much else I can do with agency, they want to speak to me as in their words "this has been an issue with other contractors before"...and talking to other contractors around the place it is an issue, heard one chap who had £6k in expenses but could not get them to resolve it.

What is the benefit to the agency for not following HMRC rules? I cant see why client would want to differ (FTSE 100 co)? Although client did want to impose unfair notice clauses.
I submitted my expenses last week for £35 fuel and £5 food...so I wrote on the bottom of the sheet £40+VAT at 20% = £48..doubt they will pay it.
I decided I will rock the boat and ask for a rate increase soon ...based on market conditions!

[SueEllen]

I told them that my accountant has advised me that I am acting correctly and will have to process my invoices in a different manner, but will advise if this issue escalates after taking HMRC advice. Not much else I can do with agency, they want to speak to me as in their words "this has been an issue with other contractors before"...and talking to other contractors around the place it is an issue, heard one chap who had £6k in expenses but could not get them to resolve it.

Agencies always want to "speak to you" when they are talking tulip.

If you have explained things to them time and time again with the appropriate reference there is nothing to talk about.

Just politely give them the number of HMRC's VAT helpline and tell them to bog off.

What is the benefit to the agency for not following HMRC rules?

It's because they are thick as tulip?

I cant see why client would want to differ (FTSE 100 co)?

The minions in the UK probably get told that they must minimise expenses.

I worked as a permie for 2 companies like this. What was most amusing is that if it was left to someone in the company to sort out transport or hotel rooms they were really inefficient in doing so.

Although client did want to impose unfair notice clauses.

Go for zero/zero on both sides as notice doesn't mean anything as you can withdraw your services.

I submitted my expenses last week for £35 fuel and £5 food...so I wrote on the bottom of the sheet £40+VAT at 20% = £48..doubt they will pay it.
I decided I will rock the boat and ask for a rate increase soon ...based on market conditions!

Good for you.

[diesel]

there is nothing to talk about.

Just politely give them the number of HMRC's VAT helpline and tell them to bog off.

.

that's a great idea!

Thanks for your advice

[diesel]

got my expenses paid for last week...as they did not pay my full amount this is their response

we pay expenses NET + VAT. As you are VAT registered we are unable to pay VAT on VAT – Please see below breakdown:

Fuel for Hire Car NET: £29.27 VAT: £5.86 TOTAL NET + VAT: £35.13
Meal on Business Trip NET: £3.39 VAT: £0.68 TOTAL NET + VAT: £4.07
TOTAL PAID: £39.20

All vattable items are paid NET + VAT, for any items which do not confirm VAT we pay the original amount + VAT as per the above

Please let me know if you have any further issues or questions
no idea why they keep asking if i have any "further" issues...as the issue is they dont follow HMRC rules...they know its an issue as they have confessed this on emails, and other contractors admit they had issues too.....i am probably the only contractor making a fuss about it. okay £6 loss last week is not bank breaking but its not the amount that is issue here its the right to follow proper tax laws. i cant believe how stupid they are....

[Contreras]

got my expenses paid for last week...as they did not pay my full amount this is their response

we pay expenses NET + VAT. As you are VAT registered we are unable to pay VAT on VAT – Please see below breakdown:

Fuel for Hire Car NET: £29.27 VAT: £5.86 TOTAL NET + VAT: £35.13
Meal on Business Trip NET: £3.39 VAT: £0.68 TOTAL NET + VAT: £4.07
TOTAL PAID: £39.20

All vattable items are paid NET + VAT, for any items which do not confirm VAT we pay the original amount + VAT as per the above

Please let me know if you have any further issues or questions
no idea why they keep asking if i have any "further" issues...as the issue is they dont follow HMRC rules...they know its an issue as they have confessed this on emails, and other contractors admit they had issues too.....i am probably the only contractor making a fuss about it. okay £6 loss last week is not bank breaking but its not the amount that is issue here its the right to follow proper tax laws. i cant believe how stupid they are....

The agency are not breaking the "rules", although they are clearly confused/mis-informed.

You keep saying that they're not following tax law, but the HMRC guidance does not set out what the contractual terms should be. That is for you and the agency to agree.

Where the agency have it wrong is to suggest that their policy is bound by VAT rules (and therefore non-negotiable). Clearly that is wrong, but not in itself illegal.

Even if the agency refuse to pay the VAT content of your invoice then that's still not a concern for HMRC. YourCo simply owes VAT on the amount received.

What matters is what does your contract say about it?

[SueEllen]

got my expenses paid for last week...as they did not pay my full amount this is their response

we pay expenses NET + VAT. As you are VAT registered we are unable to pay VAT on VAT – Please see below breakdown:

Fuel for Hire Car NET: £29.27 VAT: £5.86 TOTAL NET + VAT: £35.13
Meal on Business Trip NET: £3.39 VAT: £0.68 TOTAL NET + VAT: £4.07
TOTAL PAID: £39.20

All vattable items are paid NET + VAT, for any items which do not confirm VAT we pay the original amount + VAT as per the above

Please let me know if you have any further issues or questions
no idea why they keep asking if i have any "further" issues...as the issue is they dont follow HMRC rules...they know its an issue as they have confessed this on emails, and other contractors admit they had issues too.....i am probably the only contractor making a fuss about it. okay £6 loss last week is not bank breaking but its not the amount that is issue here its the right to follow proper tax laws. i cant believe how stupid they are....

No point continuing to complain on here it won't change anything.

Read your contract see what it says about you having a dispute and about expenses plus VAT. Get a legal opinion if possible.

Follow the dispute process dragging it out until near the contract end then take the agency to the small claims court for the money. You will mostly likely have a hearing so be prepared to have all the correct HMRC documentation printed out, as the agency don't understand the rules.