Reply to: Requesting VAT after registration

[The Spartan]

Quick question if I may at the moment it's a theoretical question though, If I'm working from the UK for a company in Switzerland I have established by searching that the services would not be subject to VAT. What I would like to know is worth it be worth registering for VAT as would I be able to claim for spending on new I.T. equipment?

[ctdctd]

I would have thought the occasional trip is unlikely to have you losing out if you're invoicing at a decent daily whack, but then I haven't done the calculations to verify that (cos I'm lazy and I don't have this problem )

decent daily whack? Haven't had one of those for a few years (oh err missus), support monkeys don't get paid the £600 a day everyone else on here earns.

It's not a problem for occasional rechargable VATable expenses - it becomes more of one when my co has to expense a hotel 4 nights a week.
As above, I can live with it for a few weeks, then we'll see.

[ctdctd]

Oh FFS...

If you're losing money by being on FRS, then get off FRS. It's hardly rocket science. You're a director, you have to operate your company in the most efficient way possible. If that means doing traditional, fully recoverable VAT accounting then do it.

It's a 10 week gig, you can't change VAT accounting mid period, and unlike other gigs, I didn't know this was their policy untill I got the first payment 5 weeks into the gig.
If they extend, I may change VAT accounting or I may not. Depends if I can be bothered!

(Luckily, I don't have an accountant so became aware of it as soon as I got payment. If I left it all to an accountant, I would fully expect not to be told until the year end!)

[Contreras]

Under VAT legislation, when recharging expenses you should reduce any VATable ones [to be VATable they have to be of a VATable nature i.e. hotel bills, parking fees, meals etc (certain expenses like flights and rail fares are not VATable) and they should contain a VAT number on the invoice if it is a VAT registered business] down to the pre-VAT element [e.g. if you had a hotel bill for £100.00 + VAT ( = £120.00) the amount that you would list on your expenses would be £100.00 and if you had a rail fare for £50.00 (that does not include VAT) the amount that you would list on your expenses would be £50.00], add them all up to get to a sub-total of expenses, add the expenses sub-total to the consultancy fees to come to a second sub-total and then charge VAT at 20% on the second sub-total to come to the grand total billable to the customer. By doing the `netting down’ process and then charging VAT at 20% on the invoice you are effectively charging VAT on any expenses that did not include VAT to begin with and you are also restoring any `netted down’ expenses back to their original costs and this the correct way to do it.

Actually, the net amount charged to the client is wholly a commercial matter agreed between the contractor and client, and not defined in legislation. There's nothing to say you can't mark this up with a 20% "admin fee" if the client would swallow it (although good luck with that).

All HMRC want to know is that you added *your* VAT on top of whatever amount is charged to the client, with a valid VAT invoice with *your* VAT number, and NOT that you passed on original receipts for the client to reclaim VAT against.

So if you can get way with charging VAT on top of the original full cost without netting down then go for it, but let's be clear this is not charging VAT on top of VAT, it is charging VAT on top of an arbitrary amount commercially agreed with the client. The client can only reclaim the VAT you added, and only you can reclaim the VAT on the original purchase (assuming VAT registered and not on the FRS).

That said, I would much prefer to negotiate a flat rate overnight expenses, or a separate "away" day rate, and avoid any arguments about the quality of the hotel & meals etc.

Also note that recharging expenses is not to be confused with charging disbursements, where you pass on the exact cost of a purchase made on behalf of the client.

[Scott C Accountant]

Under the Flat Rate scheme you can only claim input VAT on capital purchases of £2,000 or more.

It is a feature of the Flat Rate Scheme that you cannot claim VAT on other expenses but by paying over a smaller percentage effectively on your income you still gain here!

Therefore my original post about netting down VAT inclusive expenses still applies or otherwise you are charging VAT on the VAT which is incorrect!

[captainham]

Oh FFS...

If you're losing money by being on FRS, then get off FRS. It's hardly rocket science. You're a director, you have to operate your company in the most efficient way possible. If that means doing traditional, fully recoverable VAT accounting then do it.

Indeed. To add to this, you can leave FRS at any time, although normally only after the current VAT quarter. But you can't rejoin within 12 months though. Certainly not worth sticking with it if it's costing you money but that's a no-brainer.

Although you should do the calculation to see if you're losing out overall by being on FRS. By that I mean that you might be losing out on the occasional expenseable hotel stay, but you might still be gaining overall by only handing over 14.5% (or whatever your % is) of your sales turnover in VAT.

I would have thought the occasional trip is unlikely to have you losing out if you're invoicing at a decent daily whack, but then I haven't done the calculations to verify that (cos I'm lazy and I don't have this problem )

[malvolio]

Which is just what is happening to me. Client Co pay expenses net of VAT so I lose out. Can't fight them, they are too big and finance is outsourced to do the needful.

I just try and keep VATable expenses to a minimum - which save them money as well. They get upset if I choose a cheap hotel compared to the permies when away from contracted location - but they can like it or lump it!

Oh FFS...

If you're losing money by being on FRS, then get off FRS. It's hardly rocket science. You're a director, you have to operate your company in the most efficient way possible. If that means doing traditional, fully recoverable VAT accounting then do it.

[ctdctd]

Except I don't reclaim any VAT cos I'm on FRS as mentioned. So like I say, in my case I'm better off charging VAT on VAT as I've agreed the client must cover my expenses in full, otherwise I lose out if I only invoice net of VAT.

Which is just what is happening to me. Client Co pay expenses net of VAT so I lose out. Can't fight them, they are too big and finance is outsourced to do the needful.

I just try and keep VATable expenses to a minimum - which save them money as well. They get upset if I choose a cheap hotel compared to the permies when away from contracted location - but they can like it or lump it!

[captainham]

Do the sums:

You pay out £120, charge them £100 + £20 VAT and reclaim £20 and they reclaim £20. Total VAT paid £40, total VAT reclaimed £40, net VAT £0.

You pay out £120, charge them £120 + VAT and reclaim £20 and they reclaim £24. Total VAT charged £44, total reclaimed £44, net VAT £0.

So why bother with option 1?

Except I don't reclaim any VAT cos I'm on FRS as mentioned. So like I say, in my case I'm better off charging VAT on VAT as I've agreed the client must cover my expenses in full, otherwise I lose out if I only invoice net of VAT.

[malvolio]

Surely this depends on your contract with the end client though? My contract says the client will cover my expenses in full, and I'm on the Flat Rate Scheme, therefore if I incur a hotel bill of £100 + £20 VAT, then I charge them £120 + 20% VAT on top of that = total charge of £144. Otherwise I'm out of pocket to some degree.

EDIT: I agree with what you're saying in a normal scenario (just reviewed HMRC advice), but equally what I'm doing is also ok, as long as the client agrees with this of course (which they do in my case).

Do the sums:

You pay out £120, charge them £100 + £20 VAT and reclaim £20 and they reclaim £20. Total VAT paid £40, total VAT reclaimed £40, net VAT £0.

You pay out £120, charge them £120 + VAT and reclaim £20 and they reclaim £24. Total VAT charged £44, total reclaimed £44, net VAT £0.

So why bother with option 1?

[captainham]

Under VAT legislation, when recharging expenses you should reduce any VATable ones [to be VATable they have to be of a VATable nature i.e. hotel bills, parking fees, meals etc (certain expenses like flights and rail fares are not VATable) and they should contain a VAT number on the invoice if it is a VAT registered business] down to the pre-VAT element [e.g. if you had a hotel bill for £100.00 + VAT ( = £120.00) the amount that you would list on your expenses would be £100.00 and if you had a rail fare for £50.00 (that does not include VAT) the amount that you would list on your expenses would be £50.00], add them all up to get to a sub-total of expenses, add the expenses sub-total to the consultancy fees to come to a second sub-total and then charge VAT at 20% on the second sub-total to come to the grand total billable to the customer. By doing the `netting down’ process and then charging VAT at 20% on the invoice you are effectively charging VAT on any expenses that did not include VAT to begin with and you are also restoring any `netted down’ expenses back to their original costs and this the correct way to do it.

The amount that you can claim as expenses is the actual amount originally incurred when you originally paid for the costs.

Surely this depends on your contract with the end client though? My contract says the client will cover my expenses in full, and I'm on the Flat Rate Scheme, therefore if I incur a hotel bill of £100 + £20 VAT, then I charge them £120 + 20% VAT on top of that = total charge of £144. Otherwise I'm out of pocket to some degree.

EDIT: I agree with what you're saying in a normal scenario (just reviewed HMRC advice), but equally what I'm doing is also ok, as long as the client agrees with this of course (which they do in my case).

[Scott C Accountant]

Under VAT legislation, when recharging expenses you should reduce any VATable ones [to be VATable they have to be of a VATable nature i.e. hotel bills, parking fees, meals etc (certain expenses like flights and rail fares are not VATable) and they should contain a VAT number on the invoice if it is a VAT registered business] down to the pre-VAT element [e.g. if you had a hotel bill for £100.00 + VAT ( = £120.00) the amount that you would list on your expenses would be £100.00 and if you had a rail fare for £50.00 (that does not include VAT) the amount that you would list on your expenses would be £50.00], add them all up to get to a sub-total of expenses, add the expenses sub-total to the consultancy fees to come to a second sub-total and then charge VAT at 20% on the second sub-total to come to the grand total billable to the customer. By doing the `netting down’ process and then charging VAT at 20% on the invoice you are effectively charging VAT on any expenses that did not include VAT to begin with and you are also restoring any `netted down’ expenses back to their original costs and this the correct way to do it.

The amount that you can claim as expenses is the actual amount originally incurred when you originally paid for the costs.

[Wanderer]

IANAL, but I can't see anything wrong with simply charging £600 up front with a declared "intention" (ie, it might not happen) - the wording would need to be clear though.

Reading HMRC's guidance on this, it appears that you and captainham are both right and I was wrong so I apologise to captainham for my post above.

I do have to wonder what would happen if I did an invoice to a company saying that I was going to reissue the invoice as amount+VAT later but never actually did get VAT registered. What comeback would the supplier have? Certainly, I would be suspicious if one of my suppliers tried this trick...

[Contreras]

Not that this helps the OP now, but if you were always intending to register for VAT then I thought your invoices pre-registration should have included this in the invoice (but not as a separate VAT item; i.e. £500 + VAT should have been invoiced as one charge of £600, with a note on the invoice to explain why). Then when you are VAT registered, you have already invoiced for the VAT (effectively) so all you need to do is re-issue a new invoice to the client so that they can reclaim the VAT, and you've already got the money put aside to pay the first VAT bill.

Great idea! But unfortunately it's illegal to charge VAT unless you are VAT registered. As for doing it on a nod and a wink, on the understanding that you will eventually get VAT registered (but what if you don't?) - your suggestion will be met with hysterical laughter so don't even bother suggesting this one.

I was going to say something similar, but on re-reading it captainham didn't actually suggest to charge VAT on the initial invoice. IANAL, but I can't see anything wrong with simply charging £600 up front with a declared "intention" (ie, it might not happen) - the wording would need to be clear though.

Strictly speaking you must charge VAT right from the point of applying for VAT registration, ie. before being issued with a VAT no. There is a specific form of words (in the HMRC guidance notes) that you need to put on the invoice to indicate this.

[Wanderer]

My accountant has recently registered me for VAT from the date my business started, which was several months ago.

He asked me to send VAT only invoices to anyone I've invoiced previously which I've done but are they required to pay that?

Send an invoice for the VAT, enclose a copy of the VAT registration certificate and a covering letter saying that your VAT registration has now come through, backdated to dd/mm/yyyy and this is an invoice for the VAT. As Sally@InTouch says, this is standard procedure. It does sound counter intuitive but your accountant's advice is correct so just get on with it - there is nothing to wring your hands over unless the supplier actually refuses to pay. They may query it but stick to the script above and they will get the point eventually.

I presume you have discussed the implications of the flat rate scheme with your accountant and have registered for that it it's appropriate for your business too?

As Pondlife says, so long as the clients are VAT registered (and they most likely will be unless they are very small - eg smaller than your business) then it's a total non-issue because they just claim it back on their VAT return.

if you were always intending to register for VAT then I thought your invoices pre-registration should have included this in the invoice (but not as a separate VAT item; i.e. £500 + VAT should have been invoiced as one charge of £600, with a note on the invoice to explain why). Then when you are VAT registered, you have already invoiced for the VAT (effectively) so all you need to do is re-issue a new invoice to the client so that they can reclaim the VAT, and you've already got the money put aside to pay the first VAT bill.

Great idea! But unfortunately it's illegal to charge VAT unless you are VAT registered. As for doing it on a nod and a wink, on the understanding that you will eventually get VAT registered (but what if you don't?) - your suggestion will be met with hysterical laughter so don't even bother suggesting this one. (Edit: As Contreras pointed out, I was wrong on this point, see my post below with a correction and apology to captainham)

The accountant's advice is correct, follow the instructions and it will all sort itself out as if by magic.