Reply to: Expenses, Corp Tax and Dividends

[psychocandy]

I am attempting to learn a lot, hence why I am here, reading books and speaking to accountant. Waiting for my accountant to get back to me so I sought some more opinion from others. Learning what I can in between working 84 hour weeks but your concern is appreciated.

If you were with NW they would have got back to you same day.

Free month then Craig ??? ;-)

[TheCyclingProgrammer]

Anyone know what the cutoff point is where you should stop using FRS and instead reclaim full VAT? Is there a certain percentage of income where it makes sense to stop using the Flat Rate Scheme?

The simplest thing you can do is work out what your FRS surplus is and what your input VAT was (plus perhaps any losses made on re-billing expenses at net cost) and seeing how they balance out. The vast majority of contractors and freelancers should make a reasonable profit from the scheme.

Another thing that can have a big effect is the nature of your supplies - if you make a lot of zero-rated or exempt supplies then these will still be included in your FRS turnover so it could work out at a loss for you quite quickly.

[d000hg]

Anyone know what the cutoff point is where you should stop using FRS and instead reclaim full VAT? Is there a certain percentage of income where it makes sense to stop using the Flat Rate Scheme?

If you are using FRS to "make" money, then you'd need to analyse the kinds of expenses you have and whether they incur VAT or not, and then compare those against the FRS "profit".

By my calculation, FRS increases your effective day/hour rate by 2.6%. E.g if your (PRE-VAT) daily rate is £300 and you work a typical 20-day month, you bill £6000 + VAT and you make a FRS profit of £156.

As already stated, you'd have to work out how much your expenses are, to figure out where it stops being profitable.

[jamesbrown]

If you are using FRS to "make" money, then you'd need to analyse the kinds of expenses you have and whether they incur VAT or not, and then compare those against the FRS "profit".

If you are using FRS to save on your admin time, which is what it was mainly intended for, then it's irrelevant.

The latter is definitely worth mentioning but, if you have an accountant, it's muted to a large degree (yes, you do to have to review returns prior to submission...). Basically, for the type of businesses we run, the FRS is pretty much a no-brainer except in unusual circumstances, such as having 100% of your invoicing outside of the scope of VAT (while also incurring VATable expenses).

[TheFaQQer]

Anyone know what the cutoff point is where you should stop using FRS and instead reclaim full VAT? Is there a certain percentage of income where it makes sense to stop using the Flat Rate Scheme?

If you are using FRS to "make" money, then you'd need to analyse the kinds of expenses you have and whether they incur VAT or not, and then compare those against the FRS "profit".

If you are using FRS to save on your admin time, which is what it was mainly intended for, then it's irrelevant.

[jamesbrown]

Anyone know what the cutoff point is where you should stop using FRS and instead reclaim full VAT? Is there a certain percentage of income where it makes sense to stop using the Flat Rate Scheme?

There's no simple answer, because it depends on the nature of the expenses (e.g. VAT on capital expenses > 2k can be reclaimed under the FRS), among other things (e.g. supplies outside of the scope of VAT are not included in the FRS turnover). However, you can certainly do a back-of-the-envelope calculation that is relevant for your circumstances, based on your historical turnover/expenses in recent years. In the vast majority of cases, unless you regularly purchase VATable goods/services, the differential earned on the FRS turnover will be higher, i.e. the FRS will be worthwhile.

[PerfectStorm]

Anyone know what the cutoff point is where you should stop using FRS and instead reclaim full VAT? Is there a certain percentage of income where it makes sense to stop using the Flat Rate Scheme?

[Scruff]

Have you got this?

Tax Liability Cover - TLC35 - Full IR35 Insurance - Qdos Consulting

Sounds to me that your IR35 status is seriously questionable (MOO) and you should be drawing a salary. The alternatives are truly frightening!

[LisaContractorUmbrella]

If the client is paying you a daily allowance, then I'd consider very carefully whether you should be paying any dividends at all.

This. What is the allowance for?

[Contreras]

So for every £100 of expenses my company effectively ends up £14 down. Is that right?

Correct. Although this ignores the more significant billing of 8 hours (or whatever) that is only achieved through you incurring those expenses. Think of it rather as 'less profit' than an actual 'loss'. Understanding this at the outset you can quote a rate accordingly, so it shouldn't matter.

Also as others have said there is no requirement for the incurred/charges expenses to align, except by whatever is agreed in commercial contract. It's possible even to profit on each expense, which would be the case if the client agreed to pay cost+VAT and YourCo was on FRS.

[kookachoo]

Thanks TCP - Nicely put, much appreciated!

[TheCyclingProgrammer]

I actually get this Craig and have been doing this for years. However when paying for expenses personally and then claiming them thru MyCo and then billing to the client has always made me wonder if this is the right way of doing it.

Example.
I pay £100 VAT inc for a hotel out of personal funds.
I claim £100 from MyCo
MyCo bills client for £100 VAT inc
Client pays £100 VAT inc
I'm on FRS which @ 14% of £100 = £14.00 being paid to HMRC

So for every £100 of expenses my company effectively ends up £14 down. Is that right?

In that example, yes you would be potentially losing out on that £14. However there's no reason why you couldn't re-bill the expense to the client at gross cost, then add your VAT on top of that. You can re-charge your client whatever net cost you want for your expenses as long as you both agree - it could be net of the original VAT, it could be gross, it could be a flat rate, it could be a fixed amount etc. The only rule is whatever you choose to charge, you have to add your own VAT on top.

Remember you may incur expenses that were exempt or zero rated for VAT but you would still charge VAT when passing these costs on to your client anyway.

The client gets to reclaim the input VAT you charge but they may still insist on you re-charging at net cost as it costs them less overall. Its not the client's problem that you can't reclaim the input VAT on your original expense and have to deduct your flat-rate VAT from whatever you charge them.

But bear this in mind...it might seem like you're losing out on £14 in the above example but this isn't really any different to you not being able to reclaim input VAT on your purchases. The difference in the VAT you charge and your flat rate amounts to a "surplus" that is intended to cover your VAT costs without having to account for them on a per-item basis. It should also cover scenarios like this one - you probably aren't losing out overall. If you are re-charging a lot of expenses at net cost, or have a lot of VAT-able expenses, then this will eventually eat away at your FRS surplus to the point that you stop profiting from the FRS and start making a net loss. If this is the case you would be best advised to come off the FRS.

[TheFaQQer]

I actually get this Craig and have been doing this for years. However when paying for expenses personally and then claiming them thru MyCo and then billing to the client has always made me wonder if this is the right way of doing it.

Example.
I pay £100 VAT inc for a hotel out of personal funds.
I claim £100 from MyCo
MyCo bills client for £100 VAT inc
Client pays £100 VAT inc
I'm on FRS which @ 14% of £100 = £14.00 being paid to HMRC

So for every £100 of expenses my company effectively ends up £14 down. Is that right?

If that's what the contract says, then that's how you bill it.

The way I do it is:
Hotel £100 including VAT, paid for by my company
Invoice £100+VAT to clientco
£17.40 goes to VAT man

[jamesbrown]

I actually get this Craig and have been doing this for years. However when paying for expenses personally and then claiming them thru MyCo and then billing to the client has always made me wonder if this is the right way of doing it.

Example.
I pay £100 VAT inc for a hotel out of personal funds.
I claim £100 from MyCo
MyCo bills client for £100 VAT inc
Client pays £100 VAT inc
I'm on FRS which @ 14% of £100 = £14.00 being paid to HMRC

So for every £100 of expenses my company effectively ends up £14 down. Is that right?

You can bill your client whatever you want, plus VAT (whether they will pay it is another matter). Once you start expensing a lot of things, the FRS makes less sense. Otherwise, have the client book the hotel.

[kookachoo]

In that case, the flights and accommodation shouldn't be claimed as you haven't actually incurred an expense. The other expenses where you have paid out can be claimed for. If you are billing the client for the expenses then there will be no effect on profit, as turnover will increase by the same amount as the expense.

Hope this helps!
Craig

I actually get this Craig and have been doing this for years. However when paying for expenses personally and then claiming them thru MyCo and then billing to the client has always made me wonder if this is the right way of doing it.

Example.
I pay £100 VAT inc for a hotel out of personal funds.
I claim £100 from MyCo
MyCo bills client for £100 VAT inc
Client pays £100 VAT inc
I'm on FRS which @ 14% of £100 = £14.00 being paid to HMRC

So for every £100 of expenses my company effectively ends up £14 down. Is that right?