Supplier VAT - Flat Rate Scheme

[Littlebox Accounting]

As I am doing IT contracting through my company and am the Director, I have a requirement where I need to supply resources to my client.

I have the following clarification and request your assistance on this. I will use a vendor who provides IT resources. The vendor will invoice me while I invoice my client with some margin.

These are my clarification.

1. Can I use another IT contractor service and pay him using my company? Should i create him as supplier? Does I need to do anything special or register anything for this to be done via my company.

I do not see anything wrong with this. You could class this as sub contracting rather than one of your suppliers.

2. While paying the invoice bill to the vendor/supplier, I assume I need to pay 20% VAT to the supplier? If yes, can I reclaim it back since I am on Flat Rate

Unfortunately, on the flat rate scheme you are not able to claim any VAT back. You simply charge your clients 20% and pay back the set rate on your turnover, back to HMRC.

3. If i am unable to claim the VAT, what options do i have to reduce my loss since I will be losing 20% of my margin.[/QUOTE]

You could go back to normal VAT or cash accounting, otherwise there is no way around this on the Flat rate scheme. As VAT is an added tax people often get mixed up. You are actually only collecting tax from one party (your client) and paying to another party (HMRC). Therefore, because it is value added, you will not lose anything because the end consumer alway pays the tax i.e your client.

I hope this helps.

[silentbull]

"2. He will invoice me for 325 plus VAT whereas I will invoice my client 400 + VAT. I will need to pay ABC 325 plus 65 VAT for each invoice. By this, although my profit margin is 75 GBP i lose 65 by paying VAT which I can never claim back."

Ok, your output is 400 + 80 VAT = 480.

I do not know what your flat rate percentage is, but assume for example it is 16%. In this case 76.80 vat to be paid over to HMRC leaving you with 403.20.

Now, you receive an invoice for 325 + 65 vat = 390. So you profit in this scenario is 13.20.

"3. The contract is for 12 months . If i change back from Flat rate to normal one, I will end up paying 20% to government for the VAT that I am getting from client. So, I am really confused on what to do."

In this case you invoice 400 + 80 vat = 480.

You have to pay your supplier 325 + 65 vat = 390.

You have to pay vat of 80 against which you reclaim the input of 65 = 15 vat to be paid.

So in this case your profit is 75 (as you'd expect).

In terms of he agency type issue I just thought I would throw that into the mix. The question is whether you are supplying a worker or a service. I have no idea of the answer to that, but this may help you decide.

https://www.gov.uk/employment-agencies-and-businesses


As has been pointed out by Martin and Clare there could become an issue as to whether you could stay on the flat rate scheme anyway due to turnover restriction (even if you did want to).

Thanks all for the replies. My accountant mentioned that it will come under subcontractor category and will not come under Agency.Also, as you guys suggested, my accountant asked me to increase my margin or change the VAT scheme.

Thanks all! Still confused between subcontractors and Agency differences

[Clare@InTouch]

Reminds me that MyCo's next laptop purchase needs to hit £2k

Or you can add in a printer to take the whole package over that level, as long as it's on the same invoice

[kevpuk]

<snip>
2. If the costs are of a capital nature and are in excess of £2,000 you can reclaim the VAT whilst on the flat rate scheme. See the following link - HM Revenue & Customs: Flat Rate Scheme for VAT
<snip>

Reminds me that MyCo's next laptop purchase needs to hit £2k

[ASB]

"2. He will invoice me for 325 plus VAT whereas I will invoice my client 400 + VAT. I will need to pay ABC 325 plus 65 VAT for each invoice. By this, although my profit margin is 75 GBP i lose 65 by paying VAT which I can never claim back."

Ok, your output is 400 + 80 VAT = 480.

I do not know what your flat rate percentage is, but assume for example it is 16%. In this case 76.80 vat to be paid over to HMRC leaving you with 403.20.

Now, you receive an invoice for 325 + 65 vat = 390. So you profit in this scenario is 13.20.

"3. The contract is for 12 months . If i change back from Flat rate to normal one, I will end up paying 20% to government for the VAT that I am getting from client. So, I am really confused on what to do."

In this case you invoice 400 + 80 vat = 480.

You have to pay your supplier 325 + 65 vat = 390.

You have to pay vat of 80 against which you reclaim the input of 65 = 15 vat to be paid.

So in this case your profit is 75 (as you'd expect).

In terms of he agency type issue I just thought I would throw that into the mix. The question is whether you are supplying a worker or a service. I have no idea of the answer to that, but this may help you decide.

https://www.gov.uk/employment-agencies-and-businesses


As has been pointed out by Martin and Clare there could become an issue as to whether you could stay on the flat rate scheme anyway due to turnover restriction (even if you did want to).

[Clare@InTouch]

Hi Krish

Do you have an accountant? Have you discussed it with them? It might well be worth doing so, as they can do some full calculations for you that take into account your specific circumstances - for example we'd need to know your turnover to know what the flat rate scheme is currently worth to you, and how much your purchases are to know how you'd stand to gain or lose if you swapped to Standard VAT.

How long will this person be subcontracted to you for? How many days per week will they be working? If it's a month then it's unlikely to be worth leaving the flat rate scheme as the amount you'll lose over that month will be outweighed by the gain over the other 11.

[Martin at NixonWilliams]

If you are on the flat rate scheme, your profit on the subcontractor is only £10 a day rather than £75 as you cannot reclaim the VAT. Either:

- Deregister from the flat rate scheme.
or
- Increase the margin to account for the VAT you cannot reclaim. I imagine the subcontactor will not be too happy about this therefore the first option is likely to be better for you.

If you are not already registered for the scheme and the contract is to last 12 months, you will not be able to join the scheme in any case as you will breach the registration limit of £150,000 if two of you are invoicing £400 per day through your company.

[silentbull]

Hello All,

Thanks for the replies. Let me give you more explnation and you can suggest me the appropritate way.

I am currently working under a client as IT contractor who requires additional resource like me. The client is willing to pay 400 GBP per day.

I negotiated with another IT contractor who has say ABC company for 325 GBP per day. My profit margin is 75 GBP per day.

Based on the above scenario, please find my clarification

1. I assume I would need to issue contract to this ABC company as he will be considered as supplier/vendor to me.

2. He will invoice me for 325 plus VAT whereas I will invoice my client 400 + VAT. I will need to pay ABC 325 plus 65 VAT for each invoice. By this, although my profit margin is 75 GBP i lose 65 by paying VAT which I can never claim back.

3. The contract is for 12 months . If i change back from Flat rate to normal one, I will end up paying 20% to government for the VAT that I am getting from client. So, I am really confused on what to do.

4. Also, is there any issues or things to be taken care while issuing contract to ABC company. Will i be termed as Agency? What are the complications on this?

Please enlighten me as I am pretty new.

Regards
Krish

[Martin at NixonWilliams]

As I am doing IT contracting through my company and am the Director, I have a requirement where I need to supply resources to my client.

I have the following clarification and request your assistance on this. I will use a vendor who provides IT resources. The vendor will invoice me while I invoice my client with some margin.

These are my clarification.

1. Can I use another IT contractor service and pay him using my company? Should i create him as supplier? Does I need to do anything special or register anything for this to be done via my company.

2. While paying the invoice bill to the vendor/supplier, I assume I need to pay 20% VAT to the supplier? If yes, can I reclaim it back since I am on Flat Rate

3. If i am unable to claim the VAT, what options do i have to reduce my loss since I will be losing 20% of my margin.

1. I'm not entirely clear on what you are asking here but here goes! - You can use whatever suppliers you want. You do not need to 'create' a supplier, if somebody supplies your company with goods or services then they are a supplier, no registrations are required.

2. If the costs are of a capital nature and are in excess of £2,000 you can reclaim the VAT whilst on the flat rate scheme. See the following link - HM Revenue & Customs: Flat Rate Scheme for VAT

If a lot of the costs are going to be less then £2,000 it is likely that the flat rate scheme is not going to be suitable for your business. Note that if this is a short term thing, it could be worthwhile remaining on the scheme as you cannot join the scheme for 12 months once deregistered.

3. Deregister from the flat rate scheme or consider a higher margin when selling the goods to make up for it.

I hope this helps.

Martin

[ASB]

"1. Can I use another IT contractor service and pay him using my company? Should i create him as supplier? Does I need to do anything special or register anything for this to be done via my company."

It depends. You may become, in effect, an agency. Though that is unlikely. Produce the appropriate contract for your supplier and away you go. If they are sole traders you need to be careful to ensure they will not fail the employment status tests. That could be expensive.

"2. While paying the invoice bill to the vendor/supplier, I assume I need to pay 20% VAT to the supplier? If yes, can I reclaim it back since I am on Flat Rate"

You need to pay the suppliers invoice. That will depend upon whether they are vat registered or not. An element of that invoice is potentially VAT. On the flat rate you cannot reclaim it. You may like to consider the flat rate category you are using and whether that is appropriate as your business changes.

"3. If i am unable to claim the VAT, what options do i have to reduce my loss since I will be losing 20% of my margin."

You won't be losing 20%. The purpose of the reduce rate of vat you PAY on turnover under the FRS is intended to broadly compensate for the input vat which is non reclaimable. Consider leaving the FRS is about all you can do.

Edit: crossed with Clares post.

[Clare@InTouch]

1. Yes - just ask him to invoice you, then pay his invoices.

2. If he is VAT registered, then you pay him VAT too yes. You cannot reclaim the VAT though as you're flat rate registered. You can only reclaim VAT on capital items over £2,000, such as computer equipment.

3. Withdraw from the scheme. Write to HMRC and simply let them know you'll be Standard Scheme from the start of your next quarter. Whether or not it's worth doing this, or simply accept the fact you cannot reclaim, depends on the value of the VAT you'll lose out on. Remember that if you withdraw from the scheme you cannot then rejoin for 12 months.

[DirtyDog]

1. Can I use another IT contractor service and pay him using my company? Should i create him as supplier? Does I need to do anything special or register anything for this to be done via my company.

Not sure what you mean by "create him as a supplier" - if they are supplying products or services to your company, then they invoice your company for those, and you pay them.

No different from if you were buying a new laptop from PC World.

2. While paying the invoice bill to the vendor/supplier, I assume I need to pay 20% VAT to the supplier? If yes, can I reclaim it back since I am on Flat Rate

If they are VAT registered, then you pay them the invoice including VAT. If they are providing capital equipment and the invoice value is over £2000 then you can reclaim the VAT; if not, then you can't.

3. If i am unable to claim the VAT, what options do i have to reduce my loss since I will be losing 20% of my margin.

Don't register for the flat rate scheme. Or use suppliers who aren't VAT registered. Or charge them more to allow for that.

You aren't losing 20% of your margin, you are handing the VAT over to the government.

[silentbull]

As I am doing IT contracting through my company and am the Director, I have a requirement where I need to supply resources to my client.

I have the following clarification and request your assistance on this. I will use a vendor who provides IT resources. The vendor will invoice me while I invoice my client with some margin.

These are my clarification.

1. Can I use another IT contractor service and pay him using my company? Should i create him as supplier? Does I need to do anything special or register anything for this to be done via my company.

2. While paying the invoice bill to the vendor/supplier, I assume I need to pay 20% VAT to the supplier? If yes, can I reclaim it back since I am on Flat Rate

3. If i am unable to claim the VAT, what options do i have to reduce my loss since I will be losing 20% of my margin.