Paid expenses put me in IR35?

[kyber]

Referenced trains because 0 rated and therefore make you money under FRS. Point was you make a loss on vat rated expenses under FRS on net expense recovery. Might be small compared to daily rate but worth keeping in mind. A £400 hotel and evening meals bill for a few nights in London would cost you £58.

[TheCyclingProgrammer]

What is the surplus, about 2.5% ish when you get to charge gross exp + VAT. Need to claim for a lot of trains etc to cover loss of £17 each time you stay in a hotel.

Not quite. I'm talking about the surplus from your daily rate, not your expense charges. Presumably you're only incurring expenses in the first place as you're doing a day of billable work in most cases?

Train fares aren't a good example as they are zero rated anyway (so you would always be recharging them at gross cost) but let's say on a given day, you incur VATable expenses of £20 + VAT (£24 gross). Your daily rate is £500 and your client has asked you to recharge expenses net of VAT.

Total costs incurred by you: £24
Total billed to the client for they day: £520 + VAT (£604)
Income after deducting FRS percentage: £516
Gross profit: £492

Now recharging the gross amount:

Total costs incurred by you: £24
Total billed to the client for they day: £524 + VAT (£604.80)
Income after deducting FRS percentage: £517
Gross profit: £493

So overall you're only £1 worse off in the above example by recharging the net instead of the gross. You're not exactly running at a loss are you? You've recovered the net cost of your expenses in full and the £16 of FRS surplus in the first example more than covers the £4 of VAT you were unable to reclaim from HMRC or recharge to the client.

TLDR; recharge expenses at gross if you're able to when you're on the FRS, but don't get too worked up if the client insists on recharging net cost only unless you're incurring some serious expenditure. It doesn't save you much and your FRS should cover your costs in most cases and it isn't worth making a big deal out of.

[kyber]

What is the surplus, about 2.5% ish when you get to charge gross exp + VAT. Need to claim for a lot of trains etc to cover loss of £17 each time you stay in a hotel.

[TheCyclingProgrammer]

Don't forget if VAT rated, invoiced expenses must have VAT added to either net or gross expense incurred but if you are on flat rate scheme net will cost you most of the VAT; agree gross in contact if possible but since clients don't like as they see it as paying VAT twice (£144 instead of £120 on net £100 hotel expense).

Good point re: adding VAT on top regardless of what you charge for your re-billed expenses.

This has been discussed on here a million times and whilst you are correct (agents in particular don't seem to get the VAT on VAT thing) its worth pointing out that even if you only re-bill net of VAT (because client insists, agents don't understand etc.) you might still come out on top even on the FRS because your FRS surplus is designed to cover things like this. Obviously it depends on how much expenditure you're incurring overall.

Definitely try and get it explicitly in writing if you want to re-bill gross.

[kyber]

Don't forget if VAT rated, invoiced expenses must have VAT added to either net or gross expense incurred but if you are on flat rate scheme net will cost you most of the VAT; agree gross in contact if possible but since clients don't like as they see it as paying VAT twice (£144 instead of £120 on net £100 hotel expense).

[jamesbrown]

Why is this better than negotiating a day rate to include average expenses?

Factoring it in the rate works well if expenses are incurred regularly. For irregular travel, it makes sense to either ignore this or invoice separately (e.g. for international travel). In that case, I only include a single line in the invoice and use a flat daily rate plus actual flight and hotel costs (for example). Invoicing expenses just comes down to what you've agreed with the client - if it's agreed in advance it shouldn't require any explanation.

[TheCyclingProgrammer]

Why is this better than negotiating a day rate to include average expenses?

I didn't say it was better, its just another option. It may work out cheaper for the client to reimburse your expenses as incurred rather than pay an overall increase in rate, its just a matter of negotiation. Personally, I don't re-bill my normal business expenses (travel etc.) as I do see it as part of my overall rate but I would re-bill additional expenditure with my client's agreement (and this is specified in my contract). I don't go through agencies so its easier to negotiate this kind of thing.

Putting line items on an invoice is like inviting someone to comment on your choice of restaurant/accommodation, class of travel, etc. and for them to demand receipts and mis-apply VAT rules.

Perhaps, although you don't necessarily have to break everything down into individual items. Mis-application of VAT rules does seem commonplace, especially amongst agents, although its really not a matter of "VAT rules" per se whether you re-bill at net or gross, just a case of whatever the client/agency's policy is.

If the expenses are not overly variable then including it in the rate is much cleaner IMHO. You can still negotiate for exceptional expenses to be billed separately, but even these can be charged at a flat rate, e.g. £xxx per overnight stay.

I agree that accounting for general expenditure as part of your rate is preferable and a flat rate keeps things nice and simple too.

[Contreras]

You don't have to increase your day rate to cover expenses; if your client is willing to reimburse you for certain costs you incur, then YourCo can invoice for them - just add another line to your invoice "Expenses incurred as part of service - £xxx". You may choose to re-bill at whatever rate you agree with your client...net of VAT, gross of VAT, a flat rate etc. It also doesn't matter what you're re-billing for as long as your client has agreed to pay for it - HMRC expenses rules do not apply here as you're simply billing for things as part of your service.

Why is this better than negotiating a day rate to include average expenses?

Putting line items on an invoice is like inviting someone to comment on your choice of restaurant/accommodation, class of travel, etc. and for them to demand receipts and mis-apply VAT rules.

If the expenses are not overly variable then including it in the rate is much cleaner IMHO. You can still negotiate for exceptional expenses to be billed separately, but even these can be charged at a flat rate, e.g. £xxx per overnight stay.

[TheCyclingProgrammer]

You don't have to increase your day rate to cover expenses; if your client is willing to reimburse you for certain costs you incur, then YourCo can invoice for them - just add another line to your invoice "Expenses incurred as part of service - £xxx". You may choose to re-bill at whatever rate you agree with your client...net of VAT, gross of VAT, a flat rate etc. It also doesn't matter what you're re-billing for as long as your client has agreed to pay for it - HMRC expenses rules do not apply here as you're simply billing for things as part of your service.

If you incurred the expenses out of your pocket, then you should reclaim those directly from YourCo in accordance with HMRC rules for employee expenses - you may need to report this on your P11D. You don't have to though; you could just retain the extra income YourCo has made from re-billing the expenses as profit.

[stonecircle]

Thanks. I'm going to treat this as a minor one and will not negotiate to add expenses to day-rate. I used to work for a consultancy and we used to charge clients expenses all the time. I don't see how this prevents ours being a client-supplier relationship. Hays say it's common too.

However, Hays' Terms of Assignment is very misleading. On the face of it, it implies control and fettered substitution so puts me inside IR35. I'm battling to get at least the substitution clause changed, because I can't see how a cleaner one would impact them commercially\legally. They are just being obstructive out of a grossly warped risk-aversion.

[Qdos Contractor]

It certainly wouldn't be a determining factor if you were subject to an IR35 enquiry - there are other, far more important issues.

The main consideration would be if you were following the same rules and process as a permanent employee.

It's the sort of thing that would be picked up by HMRC, but if you had a genuine right of substitution, control etc., it's not going to cause too many problems.

Like you/Hays say, it's certainly common practice in the contracting industry.

[northernladuk]

Hi,
I've been on my first contract for six months as an umbrella, now changing to Ltd. I started receiving expenses after three, because my place of work changed to a location beyond commutable distance. Dave Chaplin's Contractor's Handbook says (in the IR35 chapter):
"Contractors pay their own expenses: Some clients are prepared to pay certain contractor expenses. This can attract attention as it can be seen as a sign of employment. You should include expenses as part of your rate, or only claim expenses for agreed exceptional items such as if your Manchester-based project required you to visit the client's Brussels office."

Is this really true? If I run a plumbing business, I can charge a call-out fee to cover my expenses in travelling to and parking at a client's premises. How is this any different except the quantity of time? According to Hays, they have many other contractors who charge expenses. I don't see how charging expenses makes me a disguised employee.

Because Clients pay permie expenses but not the expenses of suppliers generally. Suppliers incur the cost whilst doing business so they charge the client via an invoice. Not an expenses system. The terminology makes the difference here. You charge for cost, not incur expenses from the client.

It also doesn't make you a disguised employee, it is a flag of disguised employment albeit a fairly minor one. If the client has the same policy for all permies & suppliers and they won't budge it won't really be held as a sign of disguised employment so wouldn't worry. If you are on expenses and other contractors on site aren't then you need to worry a little.

I'm coming up to renewal. If I can no longer charge expenses for fear of being inside IR35, I'd have to negotiate adding it to my day-rate, which I'd prefer not to have to do.

Advice welcome, many thanks.

Negotiate to be re-imbursed via invoicing not their expenses system.

[stonecircle]

Hi,
I've been on my first contract for six months as an umbrella, now changing to Ltd. I started receiving expenses after three, because my place of work changed to a location beyond commutable distance. Dave Chaplin's Contractor's Handbook says (in the IR35 chapter):
"Contractors pay their own expenses: Some clients are prepared to pay certain contractor expenses. This can attract attention as it can be seen as a sign of employment. You should include expenses as part of your rate, or only claim expenses for agreed exceptional items such as if your Manchester-based project required you to visit the client's Brussels office."

Is this really true? If I run a plumbing business, I can charge a call-out fee to cover my expenses in travelling to and parking at a client's premises. How is this any different except the quantity of time? According to Hays, they have many other contractors who charge expenses. I don't see how charging expenses makes me a disguised employee.

I'm coming up to renewal. If I can no longer charge expenses for fear of being inside IR35, I'd have to negotiate adding it to my day-rate, which I'd prefer not to have to do.

Advice welcome, many thanks.