Reply to: Ltd Co Expenses VAT query with agency

[TheCyclingProgrammer]

Hi,
I have had a similar issue many years ago with an agency saying you can only claim the net expense plus VAT on invoice AND they wanted the original invoices. I was advised by the VAT office and they quoted the relevant section in the guide which soon shut the agency up as they had been underpaying their VAT because of incorrect accounting.

So this is how it works:
You spend e.g. 100 +VAT on an approved expense.

1. You keep the original receipt and claim back the VAT on your return and it stays in your accounts.
2. Photocopy VAT invoice and include the photocopy ONLY with your invoice to agency.
3. Charge 120 +VAT (gross figure plus YOUR VAT charge to them which is 144.00) on your invoice

End of story.

They are entitled to reclaim the VAT on the 144.00 you have charged them. (24.00)
They have NOT paid VAT twice. They have only paid and reclaimed the VAT charged to THEM.
Any grief contact VAT helpline and they will quote the section referred to above.
They will charge the 120+VAT to the end client.

Yes, you can do it that way. I do it that way. But it doesn't have to be done that way. Don't think there is an HMRC rule that says you should because there isn't. The only rule, is that you charge VAT on whatever you choose to recharge.

The agency are within their rights to ask for expenses to be recharged at net + VAT. They are entitled to see evidence to support the recharges (but they do not need full VAT invoices for this as the original VAT on the supply is not THEIR input VAT).

[diesel]

Hi,
I have had a similar issue many years ago with an agency saying you can only claim the net expense plus VAT on invoice AND they wanted the original invoices. I was advised by the VAT office and they quoted the relevant section in the guide which soon shut the agency up as they had been underpaying their VAT because of incorrect accounting.

So this is how it works:
You spend e.g. 100 +VAT on an approved expense.

1. You keep the original receipt and claim back the VAT on your return and it stays in your accounts.
2. Photocopy VAT invoice and include the photocopy ONLY with your invoice to agency.
3. Charge 120 +VAT (gross figure plus YOUR VAT charge to them which is 144.00) on your invoice

End of story.

They are entitled to reclaim the VAT on the 144.00 you have charged them. (24.00)
They have NOT paid VAT twice. They have only paid and reclaimed the VAT charged to THEM.
Any grief contact VAT helpline and they will quote the section referred to above.
They will charge the 120+VAT to the end client.

ihave been trying to explain this to my agent but they don't have any of it...they just keep end client policy..but I them I ask who is running their business? They don't send me any policy when I ask them for a copy (probably don't have any) and just keep fobbing me off. Anyway I gone for a rate rise otherwise its just a bullet I have to bit for now.

[pmasoft]

VAT on Expenses plus VAT

Hi,
I have had a similar issue many years ago with an agency saying you can only claim the net expense plus VAT on invoice AND they wanted the original invoices. I was advised by the VAT office and they quoted the relevant section in the guide which soon shut the agency up as they had been underpaying their VAT because of incorrect accounting.

So this is how it works:
You spend e.g. 100 +VAT on an approved expense.

1. You keep the original receipt and claim back the VAT on your return and it stays in your accounts.
2. Photocopy VAT invoice and include the photocopy ONLY with your invoice to agency.
3. Charge 120 +VAT (gross figure plus YOUR VAT charge to them which is 144.00) on your invoice

End of story.

They are entitled to reclaim the VAT on the 144.00 you have charged them. (24.00)
They have NOT paid VAT twice. They have only paid and reclaimed the VAT charged to THEM.
Any grief contact VAT helpline and they will quote the section referred to above.
They will charge the 120+VAT to the end client.

[TheCyclingProgrammer]

Just to demonstrate by way of an example.

Say over 6 months you incur £2k + VAT in expenses which you re-bill to the agency at the net cost. The total cost to you is £2400 as you can't recover the VAT. The agency pays you £2400 and you pay HMRC the flat rate VAT, which assuming your rate is 14.5% leaves you with £2052.

In isolation, it looks like you're out of pocket to the tune of £348.

But consider that over the same timeframe you've billed £50k + VAT for your time. The agency pays you £60k and you hand over flat rate VAT of £8700 to HMRC, leaving you with the £50k you charged for your time and a handy £1300 in surplus income from being on the FRS.

Now that's not all profit; it has to cover your input VAT, so subtract the £348 you "lost" on the expenses re-bill, and you're still in profit to the tune of £952 (assuming you've incurred no other VATable expenses in that period).

Not too shabby?

[TheCyclingProgrammer]

Whilst I'm of the opinion you are entitled to recharge the gross cost to your company, it is ultimately a matter of policy/contractual obligation and nothing to do with HMRC.

If you're on the standard VAT scheme then recharging the net cost recovers your expense in full as the VAT you charge the agency is offset by the VAT you paid the supplier and the whole thing is neutral.

If you're on the flat rate scheme then on the face of it, if you only recharge the net cost you are losing out because the total cost to your co was the gross as you aren't able to recover the input VAT, so you're down by whatever the VAT cost you.

BUT, that's a rather short sighted way to look at this. Do remember the whole point of the flat rate VAT scheme is that the surplus income that arises from the difference in the VAT rate and your flat rate, covers the cost of any irrecoverable input VAT you've had to pay. A lot of people seem to forget this and see the surplus as nothing more than a bonus.

That's why if your input VAT over the course of a year exceeds your FRS surplus, you should think about leaving it as you are making a loss. If your surplus exceeds your input VAT, then you've still profited from using the FRS whatever way you look at it.

Where the agency is wrong however, is the idea that they are somehow paying VAT on top of VAT. That's of course nonsense. They are paying the VAT on the cost of the services, which happens to include a recharge for your expenses. The only thing in dispute is how much you are recharging. To the agency, recharging the gross might look like you're trying to profit from the expense (and if you were on the standard scheme, you would be).

This is why it's important to get this in your contract. If I were you, I'd chalk this one up to experience, realise that due to what I said above you probably aren't losing out overall, and make sure this is specified in future contracts.

[Contreras]

11 Reimbursable Expenses
11.3 Expenses recovered shall be only those recoverable in accordance with applicable policies laid down by Client, the Employment Business or in connection with any Assignment from time to time.

So basically, "we'll pay expenses according to an unspecified policy." There is margin here for it to go either way.

If the amounts involved are significant then really you should have got this clarified in advance and, as SueEllen says, get a legal opinion for where you are now. Otherwise, IMHO, the battle isn't worth it for principle alone.

I have informed agency with respect to clause 10.3.3. and 10.3.4 looks like I need to quiz them what the actual policies are as in 11.3. I suspect when I ask they wont provide as other contractors on FRS at same client via different agencies get all expenses paid +VAT.

If the agency had half a clue they would point out the profit you make on each billed hour by virtue of being on FRS. You could then reach an agreement where you offer a discount on your rate and they would reimburse expenses at cost + VAT so you break even. That would be fair don't you think?

[expat]

If you don't do it the right way, then you would be at a loss. eg. if accommodation was £100 inc VAT, if you invoice for £83.33 + VAT and hand the VAT over to the VAT man, then you can only reimburse £83.33 to the employee without making a loss.

Idiots

But surely you (your Co) don't "hand the VAT over to the VAT man", because you already paid that amount to the hotel in VAT, so you then claim that same amount against the VAT which the client paid your Co? So accommodation cost £83.33 + VAT; you paid £100; the client paid your Co £83.33 + VAT, your Co owes the VAT man £16.67 (which the client paid your Co) MINUS £16.67 (which you paid the hotel).

As you say, you must do it the right way: it must be a reimbursement of expenses incurred on the company's behalf.

[diesel]

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.

.

Thanks guys for the advice & support
these are some clauses from my contract:
10.3 The Self billing arrangement includes the following:
10.3.3 The contractor will inform the Employment Business if any VAT rate has been wrongly calculated.
10.3.4 The contractor will check that all items which VAT has been paid do actually attract VAT.
10.4 Where VAT is chargeable the Employment Business shall pay VAT to the contractor at the prevailing standard rate applicable for the services provided.

11 Reimbursable Expenses
11.3 Expenses recovered shall be only those recoverable in accordance with applicable policies laid down by Client, the Employment Business or in connection with any Assignment from time to time.

I have informed agency with respect to clause 10.3.3. and 10.3.4 looks like I need to quiz them what the actual policies are as in 11.3. I suspect when I ask they wont provide as other contractors on FRS at same client via different agencies get all expenses paid +VAT.

Thanks for your help

[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.

[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?

[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....

[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

[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]

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!

[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.