Reply to: Umbrella companies and VAT on billable expenses

[lucyclarityumbrella]

Not a problem

[Lance]

Umbrella companies and VAT on billable expenses

Good god. So an Umbrella cannot operate VAT as VAT is mean to work. I’m glad I am LTD. When I was FRS I lost out like this, but it was offset by the FRS profit.

The message to the OP then is to use shabby B&Bs that aren’t VAT registered, or suck it up.

Thanks Lucy for taking the time to explain.

[lucyclarityumbrella]

Sorry Lucy if I’m missing something.

Sorry this is really difficult to explain and according to our auditors, can be operated in either way as long as this is consistent and there is no double reclaiming from the original receipt.

So in your example;

OPTION 1 (Brolly must wait until end of the quarter to reclaim VAT and pays out to the contractor in advance of reclaiming, brolly claims the VAT from original receipt):
Employee claims £120 inc. VAT
Umbrella, as the employer CHARGES INVOICE AS £100 + VAT and is entitled to reclaim the £20 VAT from the initial claim - ONLY IF CONTRACTOR CAN PROVIDE THE ORIGINAL VAT RECEIPT DIRECT TO THE BROLLY (Some end clients request this, in which case the brolly cannot reclaim and are unlikely to pay the VAT to the contractor)
Umbrella invoices £100 + VAT to the agency (agency cannot reclaim any VAT)
Agency invoices £100 + VAT to the client (client cannot reclaim any VAT)

OPTION 2 (Contractor is paid in full and the chain reclaim the input tax on the invoices, end client reclaims the VAT from the original receipt)
Employee claims £120 inc. VAT
Umbrella, charges agency at £144.00 (£120+VAT) - INPUT TAX - AGENCY CAN CLAIM THE £24.00 VAT BACK FROM THE INVOICE
Agency invoices £172.80 (£144 + VAT) to the client - AGENCY AND END CLIENT CAN RECLAIM £32.80 VAT AMOUNT - PLEASE NOTE THE AGENCY MAY CHOOSE TO OPERATE AS ABOVE AND NOT ADD INPUT TAX AT THIS POINT. END CLIENT IS ALSO IN RECEIPT OF THE ORIGINAL RECEIPT AND CAN CLAIM THE ORIGINAL £20 BACK.

[lucyclarityumbrella]

Thanks for the response but I'm also a little confused. In the last example, does that mean that the contractor is out of pocket and is there any rules to say that this should be the case? It seems wrong that a contractor is out of pocket because of essentially doing their job

The contractor is not out of pocket because the brolly will pay the contractor the full amount inc VAT for the expense, the brolly remains out of pocket until they can reclaim the VAT they have paid the contractor at the end of the quarter, but as I said the contractor will have to provide full VAT receipts to the brolly in order for this to happen.

[TheFaQQer]

I'd be grateful to find agencies / clients that will pay all my expenses

[alext]

Right - where do I start as this is a complicated one and one we have issues with from time to time with agencies...

So the normal scenario; the contractor submits the chargeable expenses to us, including the VAT (if applicable), assuming they can provide the VAT Receipt. We then raise the invoice and add VAT to the expenses (as they do not qualify for disbursements). This way when we receive the funds from the agency, we can pay the contractor in full (inc VAT) as they would expect> The VAT on the invoice is reclaimable then down the chain.

However, this can cause problems with some agencies and end clients who do not want to pay essentially VAT on VAT...

So the only way for a brolly to not add VAT to the invoice, is to add the full expense (inc VAT) and then not to apply VAT to that element of the invoice.

The VAT will then have to be paid back to the contractor out of the brollies pocket, and assuming they have the VAT receipt, the brolly will then be able to reclaim the VAT (albeit waiting until the end of the quarter to recoup this). Obviously if this amounts to substantial amounts then it is unlikely to be sustainable for the brolly.

HTHs and I haven't bored you all to tears with VAT talk

Thanks for the response but I'm also a little confused. In the last example, does that mean that the contractor is out of pocket and is there any rules to say that this should be the case? It seems wrong that a contractor is out of pocket because of essentially doing their job

[Lance]

Right - where do I start as this is a complicated one and one we have issues with from time to time with agencies...

So the normal scenario; the contractor submits the chargeable expenses to us, including the VAT (if applicable), assuming they can provide the VAT Receipt. We then raise the invoice and add VAT to the expenses (as they do not qualify for disbursements). This way when we receive the funds from the agency, we can pay the contractor in full (inc VAT) as they would expect> The VAT on the invoice is reclaimable then down the chain.

However, this can cause problems with some agencies and end clients who do not want to pay essentially VAT on VAT...

So the only way for a brolly to not add VAT to the invoice, is to add the full expense (inc VAT) and then not to apply VAT to that element of the invoice.

The VAT will then have to be paid back to the contractor out of the brollies pocket, and assuming they have the VAT receipt, the brolly will then be able to reclaim the VAT (albeit waiting until the end of the quarter to recoup this). Obviously if this amounts to substantial amounts then it is unlikely to be sustainable for the brolly.

HTHs and I haven't bored you all to tears with VAT talk

Far be it for me to question a professional at running an umbrella but this doesn’t make sense to me.

I agree it’s not a disbursement.

Take the hotel example.
Employee claims £120 inc. VAT
Umbrella, as the employer is entitled to reclaim the £20 VAT from the initial claim.
Umbrella invoices £100 + VAT from the agency.
Agency invoices £100 + VAT from the client.
Where is that wrong?

Unless the Umbrella cannot claim back the VAT.

Sorry Lucy if I’m missing something.

[Manic]

Hi all, apologies if this is the wrong place to post this.

When I am receiving my expenses after submitting them to my agency and it is paid to the umbrella company, the amount I receive back is minus the VAT amount. It seems to me that the company I am working for are paying the net amount plus VAT to the agency who are then paying the net amount plus VAT to my umbrella company who then just give me the net amount. Is this correct? It feels like I am basically paying the 20% direct to the umbrella company (as well as the GIANT fees).

Apologies if this is a stupid question but I am new to contracting and it feels ridiculous that I should be out of pocket for having to travel for work.

Flights are zero rated (there is no VAT) so how come they are withholding 20%??

I read Lucy's reply regarding brollies, and I can't comment on how a brolly works as I've never used them, however for B2B you should pass the net value + vat and then claim the vat as input.

My colleagues who work as permies supply receipts and get the gross value back, maybe Lucy's brolly procedure is due to the hassle of checking each receipt and claiming back what is a relatively trivial amount.

[lucyclarityumbrella]

Right - where do I start as this is a complicated one and one we have issues with from time to time with agencies...

So the normal scenario; the contractor submits the chargeable expenses to us, including the VAT (if applicable), assuming they can provide the VAT Receipt. We then raise the invoice and add VAT to the expenses (as they do not qualify for disbursements). This way when we receive the funds from the agency, we can pay the contractor in full (inc VAT) as they would expect> The VAT on the invoice is reclaimable then down the chain.

However, this can cause problems with some agencies and end clients who do not want to pay essentially VAT on VAT...

So the only way for a brolly to not add VAT to the invoice, is to add the full expense (inc VAT) and then not to apply VAT to that element of the invoice.

The VAT will then have to be paid back to the contractor out of the brollies pocket, and assuming they have the VAT receipt, the brolly will then be able to reclaim the VAT (albeit waiting until the end of the quarter to recoup this). Obviously if this amounts to substantial amounts then it is unlikely to be sustainable for the brolly.

HTHs and I haven't bored you all to tears with VAT talk

[alext]

you should be claiming the amount including VAT from the Umbrella.

E.G. A hotel is £100 + VAT you claim £120 net from the Umbrella as you're not VAT registered.

The Umbrella can claim back the VAT, so they charge the agency £100 + VAT. Agency charge client £100 +VAT. Agency reclaims the VAT they paid the umbrella, client reclaims the VAT they paid the agency. Everyone's happy.

Sounds like the umbrella are doing it wrong and trousering the 20%.

I'd be interested in what the Umbrella people on here think as I reckon they'd pay you the whole £120.

The only time you lose the VAT is when you're a LTD on VAT FRS scheme.

thanks Lance, it is exactly what it feels like. I was underpaid last week as apparently I had been overpaid on expenses for several weeks, despite only getting back what I had paid out.

[Lance]

you should be claiming the amount including VAT from the Umbrella.

E.G. A hotel is £100 + VAT you claim £120 net from the Umbrella as you're not VAT registered.

The Umbrella can claim back the VAT, so they charge the agency £100 + VAT. Agency charge client £100 +VAT. Agency reclaims the VAT they paid the umbrella, client reclaims the VAT they paid the agency. Everyone's happy.

Sounds like the umbrella are doing it wrong and trousering the 20%.

I'd be interested in what the Umbrella people on here think as I reckon they'd pay you the whole £120.

The only time you lose the VAT is when you're a LTD on VAT FRS scheme.

[alext]

Are you VAT registered? I'm guessing not...

You can't reclaim VAT if you aren't. Obviously.

I am using an umbrella company, doesn't that mean for all intents and purposes that I am an employee of them and shouldn't need to be VAT registered?

[malvolio]

It's very rarely mileage, more hotel stays and evening meals. The biggest one is flights though as they're so expensive.

The whole thing seems a bit off though as surely I shouldn't be out of pocket for travelling for my job.

Are you VAT registered? I'm guessing not...

You can't reclaim VAT if you aren't. Obviously.

[alext]

sounds about right, should the agency be paying the gross plus the VAT?

What is the expense you are claiming for? if its mileage then the whole process seems about right.

It's very rarely mileage, more hotel stays and evening meals. The biggest one is flights though as they're so expensive.

The whole thing seems a bit off though as surely I shouldn't be out of pocket for travelling for my job.

[moggy]

Hi all, apologies if this is the wrong place to post this.

When I am receiving my expenses after submitting them to my agency and it is paid to the umbrella company, the amount I receive back is minus the VAT amount. It seems to me that the company I am working for are paying the net amount plus VAT to the agency who are then paying the net amount plus VAT to my umbrella company who then just give me the net amount. Is this correct? It feels like I am basically paying the 20% direct to the umbrella company (as well as the GIANT fees).

Apologies if this is a stupid question but I am new to contracting and it feels ridiculous that I should be out of pocket for having to travel for work.

sounds about right, should the agency be paying the gross plus the VAT?

What is the expense you are claiming for? if its mileage then the whole process seems about right.