Flat rate VAT - Negative Income.

[Smith]

Hello, long time lurker now posting a question.

I'm running Flat Rate VAT scheme. - normally no probs.

My Latest role has been placed though a consulting company who are onsite doing PM/BA function, who to spread the total budget seen for the project from one company, has asked me to invoice direct, then pay the "finders" fee onto the consulting company. - I still end up with the same amount (well negotiated a small increase!)

So normal way of working is:
My Rate + Agent Fee = Cost to Client
I invoice agent - they add fee, invoice client.

This scenario:
My Rate + Agent Fee = Cost to Client (same as above)
I invoice client (My Rate + Agent Fee), Agent invoices my company (Agent Fee)

With FRS - this means I would be having to pay out VAT to agent, which I can't recuperate.

I have been told by a colleague you can place the "Agent Fee" invoiced part as "Negative Income" within the VAT return figures, and hence not pay the VAT on it.

So for my VAT return I would do:

Income from invoice: e.g. £100+Vat = £120
- Agent Fee e.g £10+VAT = £12
Total to declare for VAT : £120-£12 = £108

Which would be the amount I would have received in the standard way of working.

Is this correct?

Thanks

[GB9]

Not sure your colleague is correct. The whole point of paying out a lower rate of vat than you charge under the fixed schemed is that you don't need to account for your costs. Equally, you can't then include costs when it suits you.

What does your accountant say?

Clare or Martin will no doubt provide a definitive answer.

[DirtyDog]

With FRS - this means I would be having to pay out VAT to agent, which I can't recuperate.

You're right - unless it's a capital expenditure over £2500 (I think), you can't reclaim the VAT back.

I have been told by a colleague you can place the "Agent Fee" invoiced part as "Negative Income" within the VAT return figures, and hence not pay the VAT on it.

Ask him on what basis he comes to that conclusion - have they spoken to HMRC about it? Have they got accountant's advice on this?

So for my VAT return I would do:

Income from invoice: e.g. £100+Vat = £120
- Agent Fee e.g £10+VAT = £12
Total to declare for VAT : £120-£12 = £108

Which would be the amount I would have received in the standard way of working.

Is this correct?

Doesn't look right to me.

Income from invoice = £100 + VAT = £120
VAT amount = £20
Payment to HMRC = £120 * your FRS percentage

Invoice received from agency for £10 + VAT = £12
You pay the agency £12

[Clare@InTouch]

Pretty much WDDS. The FRS limit for reclaiming VAT is £2,000 though.

I'm not sure about the logic of deducting the agent fee as negative income either - sounds like someone using wishful thinking!

[Smith]

Thanks

Thanks for the swift replies - - I decided to plunge in and call HMRC\VAT direct - and I was advised wrong. - Back to the drawing board - - or Vat Return anyhow....

[Clare@InTouch]

Thanks for the swift replies - - I decided to plunge in and call HMRC\VAT direct - and I was advised wrong. - Back to the drawing board - - or Vat Return anyhow....

ALWAYS get a call reference from HMRC if you intend to try to rely on their advice at a later date. There are people picking up the phone who really shouldn't be there giving out advice as it's not always correct, and unless you can prove who told you what and when, you can't bind them to it. They will also give you advice based on HMRC manuals, which don't always coincide with the actual law.

[Martin at NixonWilliams]

Pretty much WDDS. The FRS limit for reclaiming VAT is £2,000 though.

I'm not sure about the logic of deducting the agent fee as negative income either - sounds like someone using wishful thinking!

I agree with Clare. It's an expense, not a credit note (which is effectively what you are being advised).

[TheCyclingProgrammer]

Unfortunately OP, as others have pointed out, by agreeing to this arrangement you're going to lose out a bit by not being able to reclaim the VAT.

However, at worst it should only be eating into your FRS surplus rather than any other income. In other words, you won't be making much if any FRS surplus income on this contract but it should hopefully not eat into your earned income.

It depends on how much we are talking but using your example, with a FRS rate of 14.5% (this is my rate)

Invoice to client: £120
VAT due: £120 * 0.145 = £17.40
Gross profit: £102.60
Agency invoice: £12 inc. VAT
Net profit:£90.60

If the agency margin is £10, meaning you would have normally invoices them £90 + VAT, which would resulted in a net taking of £90 plus a few quid in FRS surplus, then you can see that in this scenario you're still getting at least the same amount before VAT, but losing out on some FRS surplus.

Given the FRS surplus is designed to cover your irrecoverable input VAT, not just give you some "free money" then arguably it's working as it should be.

A higher agency margin could obviously affect this.