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Reimbursing of expenses and flat rate scheme

OK, so a limited company contractor has an contract with a large banking group. As part of the contract, the contractor has to spend a couple of nights in a hotel and it has been agreed that the banking group will cover these. The contractor company is VAT registered under the flat rate scheme. The question is: How does the contractor invoice for this without taking a VAT hit? For example, if the hotel cost was £120 total then would he invoice for £100 plus VAT? This would then increase his FRS turnover by £120 and he would need to pay £17.40 to HMRC. As he is on the FRS he cannot reclaim the VAT. I giess really he should invoice for £120 plus VAT but I can't see the client agreeing to this. Any thoughts?

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By squay
17th Aug 2012 16:05

Tough

The sub-contractor arranged the hotel and paid for it then he can charge the client whatever he likes as a reasonable expense and add VAT to it. Under the FRS he needs to make sure he is not out of pocket on expenses. If the contractor wasn't VAT registered he would be charging the client at least £120 gross anyway. 

If the client doesn't like the arrangement and wants to take more control of the VAT situation then they should have booked and paid for the hotel the first place. I assume the contractor is in business to make a profit!?

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18th Aug 2012 17:12

Gee, thanks

Such kind words. I thought Gregory House was a doctor not an accountant.

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19th Aug 2012 00:56

True though
Some one is going to be out of pocket, I see no reason why the client should recharge exact amounts for expenses, if they seek to leave him in the same position then £139.53 including VAT does it, anything less leaves your guy picking up the cost.

Regards

MtF

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21st Aug 2012 15:37

Squay! Would like to ask you a question if you do not mind?

“If the contractor wasn't VAT registered he would be charging the client at least £120 gross anyway”.

Would the client be able to claim the VAT then?

This practice is normal in fee-earning based work. Let’s say for instance, I do a consultancy work as a free-lancer on behalf of a company I work for. I am not a VAT registered. If the work I do involves VAT (expenses),I will recharge the total gross amount to the company. I would assume the company should be able to claim the VAT though the VAT is between the contractor and client, not the company. Am I right?. Please help

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22nd Aug 2012 10:52

No you are wrong

VAT can only be recovered by the person to whom the invoice/receipt is addressed.

Unless you incurred the expenses as a (disclosed) agent of the company in which case it would be a disbursement.

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By squay
21st Aug 2012 16:23

NO

The supply of the expense (hotel for example) is to you the freelancer. The supplier's invoice will be to you in your name. The contractor therefore cannot claim back the input VAT as the supply was not made to them. You will charge the contractor the gross amount so you are not out of pocket. You may charge more, it depends on your arrangement with your client.

As you can see the contractor loses out on claiming back the VAT from you because you are not registered and cannot charge it. As I said in my earlier post, the only way the contractor can claim back the input VAT is if they book and pay for the hotel (or any other expense) themselves.

Remember that input VAT that has been correctly charged can only be claimed back by the VAT registered business that the  supply was made to.

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21st Aug 2012 16:36

FRS

In most cases, the contractor will only be on the FRS because he makes money from it. If he regularly starts incurring and invoicing expenses like this he will make less money from the FRS.  That's life.  If he doesn't want the "VAT hit" then he can always come off the scheme.

I bet in a normal quarter he makes way more than £17.40 from the FRS, so I agree with the "Tough" comment.

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21st Aug 2012 21:16

Squay and Chris,

Thank you very much for clarification!

What happens to the VAT if the sub-contractor is a standard- registered VAT?

Chris: what is (disclosed) agent?  Could you please give me an example in employee/Employer/Subcontractor setting.?

Thanks again!

 

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21st Aug 2012 21:53

Are we all 100% sure on this? I'm not an expert on the flat-rate scheme, but:

Is there no chance these hotel bills count as disbursements? Per the HMRC FAQ on the FRS if so wouldn't count as taxable turnover.Hotel bills (and similar) are a special case in terms of recognising input VAT - they don't have to be in the name of the taxpayer. From a UK GAAP perspective if these costs are being passed on to the client without any markup there would be a good argument for not recognising as turnover (think it's PWC's UK GAAP book that covers this but don't have it with me at the moment). 

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By BKD
22nd Aug 2012 09:32

Disbursements???

The Limey wrote:

Is there no chance these hotel bills count as disbursements?

No -  a disbursement is a cost of the client, met by the agent on the client's behalf. The hotel bill is a cost of the agent - the fact that there is an agreement for the client to reimburse the agent for the expense doesn't alter that.

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22nd Aug 2012 09:43

Yeah, will agree that there's no chance on that one - VTAXPER39000

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22nd Aug 2012 14:07

I think I found the answer to my questions on this link

http://www.accountingweb.co.uk/anyanswers/subcontractor-vat

Subbys are not registered for VAT

Can my client claim the VAT back on the expenses submitted ?

Your client cannot claim VAT on the sub-contractors expenses as they are not supplies to, or for the purposes of, your client's business.

The expenses form part of the cost components of the sub-contractors supply to your client. Indeed, the separation of the expenses on the invoice is in reality artificial. It does not form a separate supply to your client but is a way of working our how much the sub-contractor charges for the work he/she is carrying out.

So, my next question would be what is the point of the separation of the expenses on the invoice

regardless of the status of the VAT, i.e whether or not the sub-contractor is VAT reg or not, as the cost of the VAT is boune out by the contractor?

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