Reply to: Expenses Claimed Back via Agency When Using Self-Billing

[Fred Bloggs]

Thanks, yes that was Fircroft. I don't see any disagreement, what I said and what you said seems perfectly valid to me. Contractual issues don't enter into it as far as I can see. Never mind.

[TheCyclingProgrammer]

In this case, the HMRC guidance is actually clear. Unfortunately, I seem to have mislaid my copy. Google should be a help.

Is this the copy you took when I first explained to you how this all works, including the difference between recharges and disbursements, 5 years ago.

http://forums.contractoruk.com/accou...submitted.html

You're right, Google was helpful.

[TheCyclingProgrammer]

And here's the previous time we discussed this, with the same outcome. I wish people would learn to use the search function! /nluk

http://forums.contractoruk.com/accou...ur-client.html

And another one from early 2014:

http://forums.contractoruk.com/accou...ontractor.html

No wonder these expense/VAT threads give me a sense of deja vu. At least I'm consistent.*

Bottom line: recharge gross cost plus VAT if your client is happy for you to markup your expenses and make a small profit. HMRC don't give a tulip as long as you account for VAT on your sales correctly.

If they want you to recharge net cost then do that. Don't waste time arguing with agencies over HMRC guidance that doesn't exist or what some other contractor told you down the pub. Keep an eye on your VAT inputs vs FRS surplus over the course of the year to make sure remaining on the FRS remains profitable and remember you're already in a better position than somebody who has to absorb the costs in their daily rate!

* I did used to have more sympathy with the view that people on the FRS scheme should recharge at gross cost to avoid losing out but have come to change my view on that over the years. The FRS doesn't allow for direct reclaims of input VAT but it *does* have a means of input VAT recovery built into it.

[TheCyclingProgrammer]

I'm not that bothered either way what you believe, but in this case you are wrong. And no, it is definitely not a contractual matter.

For those who want to see the actual correct VAT treatment of recharges and disbursements, including what is a recharge and what is a disbursement - It is all set out in a HMRC pdf document giving clear examples of how it works. In this case, the HMRC guidance is actually clear. Unfortunately, I seem to have mislaid my copy. Google should be a help.

No, I'm not wrong. How could what you pass on to clients as far as recharged costs go be anything other than a contractual matter?

I'm well aware of the difference between a disbursement and a recharge and in this case we are discussing recharges.

A recharge is whatever you choose to recharge your client for costs incurred. What you recharge is entirely a contractual matter (it could be nothing, it could be a flat rate, it could be actual costs, it could be a fixed fee). HMRC don't care any more than what you charge as a daily rate - as long as you add VAT on top that's all that matters. It's all just part of your service fee. It doesn't even have to be itemised unless the client asks you to.

I might incur travel costs to client each day of £50. Contract states they will not pay my travel costs so I recharge £0. This is fine

Another client pays a flat rate of £30/day + VAT for travel costs so even though my travel costs were £50 I recharge them £30 + VAT. Also fine.

Another client states I can recharge any costs incurred net of VAT. I incur £120 inc VAT on costs so I recharge them £100 + VAT. Also fine.

When we discuss whether we recharge our expenses net of VAT or the gross cost (before adding our own VAT) the VAT element on our expense is a red herring - all we are really discussing is how much we are charging our clients for our service, not the VAT treatment. Whatever we charge, we add VAT on top.

Nowhere will you find HMRC guidance supporting your view that recharges should be charged at gross cost. I suggest you read it again. You'll find it has very little to say on recharges other than clarifying what they are and how they differ from disbursements:

https://www.gov.uk/guidance/vat-cost...a-disbursement

[Contreras]

The HMRC guidance is clear. It's not a disbursement.

But HMRC don't give a hoot on the amount you recharge, just that you add VAT on top.

That means for an original £100+VAT expense, you may charge £100+VAT, or £120+VAT, or anything else + VAT.

The actual amount is a contractual matter.

You can argue the toss with the agency, but really it should be written in the contract, especially if there was an expectation to recharge expenses. The agency might misinterpret VAT rules, but that that's not the same as breaking them, where the actual amount recharged is in question.

Clearly if YourCo generated the invoice it would not say £100 + VAT + VAT.

Just another reason to say no to self billing, IMHO.

[Fred Bloggs]

It's entirely consistent with HMRC rules. There are no rules about what you should recharge for your expenses. It's a contractual matter.

I'm not that bothered either way what you believe, but in this case you are wrong. And no, it is definitely not a contractual matter.

For those who want to see the actual correct VAT treatment of recharges and disbursements, including what is a recharge and what is a disbursement - It is all set out in a HMRC pdf document giving clear examples of how it works. In this case, the HMRC guidance is actually clear. Unfortunately, I seem to have mislaid my copy. Google should be a help.

[TheCyclingProgrammer]

Ok, except I'm not on FRS. And your FRS income is liable for CT of course.

Fine, but the point being discussed is what to recharge when on the FRS.

If you're not on the FRS then the whole thing is much simpler. If you incur a cost of £100 + VAT then you recharge the same to the client. After netting off the VAT your cost is fully recovered. You and the client both recover the VAT on your VAT return and everyone is happy.

Yes, your FRS surplus counts as turnover, but the input VAT element of your expense is also tax deductible as it can't be recovered on your tax return. So it would be more accurate to say that your FRS *profit* is liable to CT which can of course be calculated by deducting the amount of input VAT you've paid from your FRS surplus income.

And as I pointed out before, if at the end of the year you're making a profit from the FRS, then you're not actually losing out by recharging the net cost of any expenses.

[malvolio]

And the clients don't care that you can't directly recover the input VAT.

Regardless, it's not necessarily true to say that if you are on the FRS that the input VAT on any expenses represents the true cost because if those expenses are directly related to billable work then that cost may be partially or fully covered by the margin you make from being on the scheme.

For example, if you incur costs of £100 + VAT in the course of doing two days billable work at a rate of £500/day then the simplistic view is that you've incurred £120 in costs and that is what should be added to your invoice before VAT.

However let's assume you recharge your expense at net cost on the insistence of the agency. Your total invoice is now £1100 + VAT which is £1320. Assuming a FRS rate of 14.5% you would pay HMRC £191.40 in VAT which leaves you with £1128.60. Less your £120 costs and you've made a gross profit on those two days work of £1008.60.

So in this scenario the £20 VAT on your expenses does not represent a net cost at all, so why should you be entitled to charge extra for it? The fact is for the typical contractor on the FRS not only do they effectively recover their input VAT costs from the FRS surplus (which is the whole point of it), they usually profit from it. Yet you want to have your cake and eat it and bill the client for the VAT too. Bit of a cheek really.

Obviously if your expenses are high and you're not making enough surplus from the FRS to cover the VAT on your costs then you're going to make a loss - this is the case regardless of what you charge your clients. But it's not necessarily an argument for charging the client more, it's an argument for coming off the FRS entirely.

If you would normally profit from the FRS but the costs in servicing one particular client are high then that may be an incentive to negotiate on what you charge for your costs (or your daily rate should perhaps be higher) but the idea that as a rule somebody on the FRS should recharge expenses at gross cost is rubbish.

Ok, except I'm not on FRS. And your FRS income is liable for CT of course.

[TheCyclingProgrammer]

But I don't care. I'm recharging my costs incurred servicing their requirements.

And the clients don't care that you can't directly recover the input VAT.

Regardless, it's not necessarily true to say that if you are on the FRS that the input VAT on any expenses represents the true cost because if those expenses are directly related to billable work then that cost may be partially or fully covered by the margin you make from being on the scheme.

For example, if you incur costs of £100 + VAT in the course of doing two days billable work at a rate of £500/day then the simplistic view is that you've incurred £120 in costs and that is what should be added to your invoice before VAT.

However let's assume you recharge your expense at net cost on the insistence of the agency. Your total invoice is now £1100 + VAT which is £1320. Assuming a FRS rate of 14.5% you would pay HMRC £191.40 in VAT which leaves you with £1128.60. Less your £120 costs and you've made a gross profit on those two days work of £1008.60.

So in this scenario the £20 VAT on your expenses does not represent a net cost at all, so why should you be entitled to charge extra for it? The fact is for the typical contractor on the FRS not only do they effectively recover their input VAT costs from the FRS surplus (which is the whole point of it), they usually profit from it. Yet you want to have your cake and eat it and bill the client for the VAT too. Bit of a cheek really.

Obviously if your expenses are high and you're not making enough surplus from the FRS to cover the VAT on your costs then you're going to make a loss - this is the case regardless of what you charge your clients. But it's not necessarily an argument for charging the client more, it's an argument for coming off the FRS entirely.

If you would normally profit from the FRS but the costs in servicing one particular client are high then that may be an incentive to negotiate on what you charge for your costs (or your daily rate should perhaps be higher) but the idea that as a rule somebody on the FRS should recharge expenses at gross cost is rubbish.

[malvolio]

If you're recharging gross instead of net cost then it's still more expensive to the end client, regardless of VAT.

But I don't care. I'm recharging my costs incurred servicing their requirements.

[TheCyclingProgrammer]

Thanks for your reply, Alan. That may be the case for end clients but surely agencies will be charging on any expenses to the end client, so they won't be out of pocket.

If you're recharging gross instead of net cost then it's still more expensive to the end client, regardless of VAT.

[fidot]

I think it's not to to do with whether it's reclaimable or not. I believe they're reclaiming the VAT regardless. The issue is what represents the net cost after VAT. E.g., if you've didn't £100 you should charge £100 plus VAT = £120. Many agencies contend that you should charge £100 inc VAT. So, if you've a lot of expenses it could mount up.

Thanks for your reply, Alan. That may be the case for end clients but surely agencies will be charging on any expenses to the end client, so they won't be out of pocket.

[TheCyclingProgrammer]

That's right, many agencies do this. But it is clearly not correct according to the published HMRC guidelines on the VAT treatment of recharges and disbursements. Why does this situation persist? I can't be the only one to have had a big falling out with an agency over this?

It's entirely consistent with HMRC rules. There are no rules about what you should recharge for your expenses. It's a contractual matter. If client insists expenses are recharged at net cost then there is nothing wrong with this. The only rule is that you just charge VAT on top.

If you were on the standard VAT scheme and reclaim VAT then a £100 + VAT expense would in reality only cost you £100 so it's entirely reasonable that you would also recharge £100 + VAT. The whole thing is VAT neutral and you recover your costs in full.

The fact you're on the FRS and can't recover the VAT is not the client or agencies problem. You should in fact be recovering the VAT as a result of making surplus income from the way the FRS works. If your input VAT on expenses is outweighing the FRS surplus income then you should come off the FRS.

[malvolio]

That's right, many agencies do this. But it is clearly not correct according to the published HMRC guidelines on the VAT treatment of recharges and disbursements. Why does this situation persist? I can't be the only one to have had a big falling out with an agency over this?

You're not. But you need to work out how to persuade agencies to tear up their cosy internal accounting systems and stop paying our invoices through their payroll which are obviously geared for permanent employees who can't reclaim VAT. The VAT itself is not the issue, it's their costs of running two separate payment systems that they see as being totally unnecessary since we aren't after all, independent businesses and they don't deal with MyCo, they believe they are dealing with Me, poor deluded £27bn a year business that they are...

But if we could fix that then 90% of the issues we have with contracts, IR35, VAT and interpretations of professional working days would go away overnight. And that's not going to happen.

And it's pointless railing at IPSE or anyone for not doing this: have you asked them to?

[Fred Bloggs]

I think it's not to to do with whether it's reclaimable or not. I believe they're reclaiming the VAT regardless. The issue is what represents the net cost after VAT. E.g., if you've didn't £100 you should charge £100 plus VAT = £120. Many agencies contend that you should charge £100 inc VAT. So, if you've a lot of expenses it could mount up.

That's right, many agencies do this. But it is clearly not correct according to the published HMRC guidelines on the VAT treatment of recharges and disbursements. Why does this situation persist? I can't be the only one to have had a big falling out with an agency over this?