My client is a sole trader. She teaches yoga/Pilates etc and believed that she was billing the studios for whom she does work on a provision of services basis, with an hourly rate. So far so simple.
However, I've discovered that one studio invoices her. She didn't really understand these 'reverse invoices' so I've taken a look. It seems that they are claiming that all fees paid by clients are earned by her as teacher and that she is paying a huge sum to rent the room. They then manipulate the room fee to achieve their agreed rate of £30 per class. This means that she will earn the same each month for the number of classes taught, but the room rate fluctuates wildly in line with the number of clients.
I think they are doing this to try and demonstrate that they are not employing their teachers, although I'm not experienced enough to know if this is offering them other tax benefits. I'm not too worried about that (although I am not convinced what they are up to is 100% above board).
My concern is that, my client is no longer in a relationship with them in which she is providing services, instead she is effectively hiring a room (according to the paperwork) and is not invoicing for services, but instead is being invoiced for room hire and is receiving a residual payment for the monies apparently collected in her behalf. My concern is that this affects things like her return and the income and expenditure she needs to show on her UC application each month (her income is well down in lockdown, so she has a bit of benefit money coming in too) was these invoices effectively hugely inflate both her income and expenses well above the level she thought, because her perception was simply that she was earning an hourly rate.
Is this legal? Does she need to try and invoice the business on her terms rather than submit to their accountancy practice, or does she just accept it and change the figures she's resorting to HMRC to be in line with the way she's being invoiced by the company she's working for.
(If this was ever looked at, I think it would be exposed as they clearly own the client relationships and effectively employ the teachers, but like I say, that's not my concern, I just want to get these accounts correct for my client!)
When it all started happening the studio told them that nothing was changing, they just were no longer doing their own invoices, but this situation didn't seem right to me.
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Is this not akin to a hairdressing shop?
I think you have to separate the commercial (how much her landlord is actually charging and is that 'fair') from the tax implications - who is billing who.
I think there are similarities. The exception is that there is not a true landlord to tenant relationship and no documentation to that effect. The relationship started as my client providing a service to a business (teacher/instructor) and they changed their practice/relationship unilaterally for accounting purposes. They have led their instructors to believe there is no material change they as instructors believe they are billing for time. But the paperwork says they are being billed for hire. The trouble is they are being put into a situation where what they think is happening is different to the paperwork.
Agreed, that's my next step, but I felt that I had an opportunity in the interim to get a little better informed and if I was very lucky find an expert (I'd like to be able to refer where I can). I am pretty conscientious and as you can tell, given it's a client who is on UC, I am trying as much as possible not to load her up with professional fees as she's not wealthy and has been affected by the Corona situation. Not my normal type of client but sometimes you just have to do what you can for people.
Agreed, that's my next step, but I felt that I had an opportunity in the interim to get a little better informed and if I was very lucky find an expert (I'd like to be able to refer where I can). I am pretty conscientious and as you can tell, given it's a client who is on UC, I am trying as much as possible not to load her up with professional fees as she's not wealthy and has been affected by the Corona situation. Not my normal type of client but sometimes you just have to do what you can for people.
''sometimes you just have to do what you can for people''
But you are not helping if you dont know what you are doing.
She doesnt need to be 'loaded up with professional fees'
Again, I agree, I am just trying to find the right path to set her off on! The what I can is helping inside my own field, but I have discovered something strange and want to go back with information which will allow her to take the next steps informed rather than simply scaring her because I have found something unusual.
What's tough is that for some of her work she earns £10 an hour, she lives in another world of cost and value, so even if someone costs her £50 to help inform her, that's 5 hours work for her at the moment and the truth is she's not going to get much expert help for £50.
But you are not helping if you dont know what you are doing.
Isn't the purpose of this forum to seek answers and assistance from fellow accountants when you DON'T know the answer yourself? Or is this place just for those who already know everything? There's nothing wrong in asking for help so you're better placed to help.
'Ifa'. 'Reverse invoices'
Just some of the clues that clearly not an Accountant, now confirmed.
Help, yes, but filling a gap that wide? He should not be advising.
I don't see you helping in this case.
OP, hope if you are doing here accounts as you say above, that you are not charging her, without having MLR and PII in place. A little knowledge an all that.
I've already stated quite clearly that I'm not an accountant in another reply, nor am I acting as one. As a professional in another field I'm well aware of the dangers of a little knowledge. (I've encountered plenty of accountants and solicitors who think they can do my job without authorisation and qualifications) That's why I'm here, I've found something I don't understand and I want to send her in the right direction without scaring her.
Clearly a reverse invoice isn't a thing, is what she was told that they are by the company she's dealing with who were guided by an accountant into this practice.
Like I say, I'm advising only in my field and have uncovered a strange situation. If having described it on here the feedback was that is totally normal, I'd have not even mentioned it to her.
Congratulations on staying so professional and polite in the face of invented allegations.
Have I understood this right.
She thought she was billing them for an hourly rate to teach classes, but they are self billing her the total fees of each of the clients and then some how manipulating the invoice to bring it down to a payable balance that Equals the hourly rate?
In affect they are inflating her turnover?
I think she needs to establish whether she is acting as intermediary (if that's the right term?) and if so, establish whether the whole invoice or part of it is declarable.
She thought she was billing them for an hourly rate to teach classes, but they are self billing her the total fees of each of the clients and then some how manipulating the invoice to bring it down to a payable balance that Equals the hourly rate?
In affect they are inflating her turnover?
This is it, yes.
That's exactly what I'm trying to understand. I'm also not convinced this is at all ethical.
Is it possible that the studio are endeavouring to reduce their apparent turnover to below the VAT threshold?
As others have said you do need your client to talk to an accountant. But it would be useful if when she goes, she is able to be clear about who her customer is.... The studio or the person coming to the class.
Very possible.
I think that's the trouble, as far as she's concerned the studio is her client and she services their clients in behalf of the studio. But the studio is claiming the clients are he's and she's renting the space. Demonstrably not true though as she has a non compete clause preventing her from advertising to or seeing those clients directly. The studio is attempting to have everything their way, but things like her tax return and expenses then appear to be inaccurate, even if the net result matches.
[quote=TimFramp] "she has a non compete clause"
So she hs a contract then?
I wonder why they are self billing of not vat reg?!
Well, I say non compete clause, I'm using common jargon there. It's not a proper contact, although she does have signed agreements with some of her client firms/studios, is also very old. I've not seen it, so I don't know its standing, is just what she's told me when I asked her about it, so I don't have the full picture.
Are you an Accountant as well as an IFA Tim?
Is there Vat on these self billed invoices?
Out of interest, what type of venue is this?
I'm not, did some learning years ago, but haven't held myself out as an accountant at any stage. I've stumbled across this as part of my own work and want to raise it with her and need to do so in a way that is informed enough to send her in the right direction without claiming any knowledge.
There's no vat.
The venue is a yoga studio, a kitted out room, with a reception and receptionist. But if she were going to rent space we they are claiming she is, she could do so at a vastly lower rate.
I wouldn't jump to that conclusion. This whole arrangement could be all about VAT.There's no vat.
Sorry I meant there is no vat stated in the invoices the company produces and sends to my client. They very well could be doing this to try and avoid vat at their end.
Others may disagree with me and that's fine.
But if she has an agreement that states the clients are not hers, she can not scout for new clients, then clearly they can not raise an invoice as if they were.
I'd be inclined to just declare the invoice amount that is the billable hours paid, and if it ever came up, argue the point.
The facts are, she believes she invoices for her time, she is only paid for her time, and she has an agreement that states she doesn't have rights over the clients. Everything except the invoice points to it being paid for her time only.
And so I'd treat it that way, and point hmrc in the direction of the yoga company should it crop up.
point hmrc in the direction of the yoga company should it crop up.
Honest question (I don't know the answer): does she have any duty to point HMRC in that direction before it crops up (from other causes)?
OK, I'm not disputing that, but I was coming at it from the angle of potential costs and whether a professional advisor should be warning her accordingly. If she has such a duty (which neither of us seems to know but both of us think is possible) and fails in it, could it cost her?
If it is just her time and you add in non compete clauses (control), then following on from that, she is potentially an employee with an employer that is using her to understate turnover.
Also not sure, but I suspect Tim, that you may have reporting obligations, if your wish to understand has put you in the position where you have gone beyond speculation, to that of having a reasonable suspicion.
Tim, you say "I just want to get these accounts correct for my client!". Out of interest if you are a regulated FA does your PI and AML cover the provision of accounting services or are you just doing this as a favour?
My 10p worth on this is that it is first of all a contract matter which might benefit from legal advice (perhaps you give this as well on the side). And in the absence of a clear agreement to the contrary, the instructor should just put their fees in the accounts. What they do otherwise depemds on how far they want to rock the boat. Its lockdown, assess the situation, and be prepared to not work with them in the future.
Sorry, my mistake, I mistyped. I meant my understanding of the accounts and I want her to have them correct, I'm not doing the accounts for her, I'm advising her on pensions and life insurance. Part of my responsibility is understanding affordability, she passed me various documents and I've seen something strange in there. She's not a normal client, I'm already doing her a personal favour as a friend because she can't afford the normal fees, we've had conversations about what's there and she gave me a precis of her understanding of how things stand and I've asked a few questions because it doesn't seem to match up. It's not my field, so whilst I have a cursory understanding, it's enough to get myself in trouble, not out of it, so I'm trying to gain enough insight to know whether first, it was all fine and I worried about nothing, or what level of expert help to send her toward. I feel duty bound to point out something strange that I've seen and she hasn't, but equally I don't want to create a bigger problem.
As things stand, she accounts as if she's charged a professional fee, my worry is, although unlikely, if the paperwork was ever looked at that all the paperwork evidences a different arrangement. There isn't a contract that says this is how it should/will work.
Thanks for clearing that up. I suppose its worth considering the future as well as the past. Does she need to work with them again (I'm assuming the studio is in lockdown at the moment)? If not, she could write to them to the effect that she does not accept their invoices becaue that was not the arrangement she had entered into, and request credit notes. And tell them she'd only be prepared to work with them on the basis she originally understood. Perhaps reserve judgement on the need to inform until she's decided what to do in the future. Maybe now's the time to consider setting up properly, hiring a hall and running her own classes, according to Mrs P there's a lot of pent up demand and after the last lockdown there were waiting lists for classes. Some pubs were even hiring out their function rooms for exercise classes. Not being terribly active I'm only on the waiting list for a bar stool if/when the pub reopens for drinking.
It sounds like the studio is trying to keep their own income down, i'd guess to avoid VAT.
The arrangement of fee per class is pretty standard, they don't need to go to these lengths to show that instructors aren't employees
But if* they are successful in shifting turnover to the trainers, then it is the trainers' turnover (and that was the question).
*if.
Ah, that was a follow-up to my question - subject of a sub-discussion above - the question I was referring to as "the question" was the question to which AthollAccounts was responding - the question in the OP.
Another angle on this is liability and insurance maybe. It may not have been thought of by the studio, but if one of the class attendies gets injured who is liable - will depend partly on whose clients they are - hers or the venues. Does she have insurance cover to teach?
I have an interesting point to add.
A client of mine had a larger business (unfortunately now closed down) where the building that was occupied by that business was actually owned by his SIPP pension.
It's my understanding that in that scenario the rent collected from the limited company would be paid in to the pension pot.
It's a wild possibility, but what if the studio building is privately owned and this is some mechanism to extra money from the business? This could apply if the building was owned by an individual, pension, etc.
Just a thought. Oh and your friend needs her accountant to review this in detail, based more likely on the direct paperwork and figures rather than your interpretation (however considered that may be). It sounds complicated.
The arrangement you've described, holding a property in a SIPP or SSAS is common (one of my areas of expertise). It's not the case here and certainly isn't the reason for the strange relationship between my client and her client/employer. It seems the studio is a third party tenant of the property owner in a conventional lease arrangement as far as my client understands it, but it doesn't affect her either way.
She doesn't currently have an accountant unfortunately. Her income is usually around £15k a year and she does her returns on a cash basis for simplicity.
I’m completely lost. Tim wants to get the accounts right, but isn’t advising, and that that was all a typo and he just wants the to be right. I thought he might be a bookkeeper but it turns out he’s an IFA, his client had a non compete clause but they actually don’t as Tim was just using ‘common jargon’ although the client can’t poach or approach so might have after all.
Can someone (slowly) explain to me whether the client gets paid more if there at twenty people in the class than she does if there are 15? Also does she make a loss if only one person turns up, and who do the punters think they are giving their fiver to?
Sorry, no. I've no idea what Tim is doing. In all honesty, it doesn't sound (unless he's filing an SAR... Tim, I'm referring to AML not ITSA) as if he's staying within his professional remit. (That's not meant as a slur, Tim. It's always tempting to help clients in need. Guidelines are there to save us from ourselves sometimes. Bear the guidelines in mind. Proceed with caution.)
However, I think the answer to his question is that someone has the turnover. Who, depends on my starred "if" above. That's initially a legal "if". I wonder whether anybody took legal advice at any point of the story. It doesn't sound like it, but would Tim know?
It's always difficult when you uncover something that's outside your area, but which you know instinctively looks wrong. I'm not advising on it, I'm trying to understand enough to know where to send her and to not sound completely stupid when I talk about the issue because the last thing I want to do is scare her.
She shouldn't need to be scared. She's not at fault. Her tax (presumably) hasn't changed.
It's not so clear the same can be said of the other party to the arrangement.
Tim appears to have disappeared.
As have a couple of comments, silently removed by sift.
One of 'the team' at Tim's co is a yoga teacher, so perhaps it's her he is trying to assist, but oddly is also their accounts lady perhaps not as you would expect her to have a bit of a clue about billing. (No I'm not suggesting what anne did before her comments were wiped).
Not sure how you can do a typo to show that you are doing the accounts, but didn't really mean that.
All very strange.
The accounts are already done, by her, she has passed them to me when I asked her about her income and expenditure, so I didn't mean I was doing the accounts and getting them right, I meant I was looking at them and trying to understand them correctly. I apologise for the misunderstanding/misleading nature of what I wrote.
Going round in circles. Get an Accountant to do her accounts. Does not need to be a great expense, but at least it won't then come back to bite.
I apologise. The trouble is that I didn't want to write a while diatribe explaining myself before getting to the point of the question, but I didn't mean to be misleading.
On the point of 'non-compete' I didn't ask enough around it as is didn't seem all that relevent. All I know is that she isn't allowed to approach the clients to work with them privately, but she doesn't have a formal contractual arrangement, so I suppose it's just an understanding.
She gets 'paid' £30 per class taught, but the way this company apparently invoices her is, if clients pay say £10 each and there are 9 in attendance their invoice shows that she has 'earned' £90 and that she has been charged £60 for the use of the room. So her net for that hour never changes, but the rate for the room varies in line with attendance. The invoice doesn't break it down by class it has a total income from clients, a total room charge and a net result which is £30 X number of classes, but presumably if for any of those only one person turned up, the studio makes a loss as she still gets paid £30. Punters think they are paying the yoga studio.
She used to just bill for time but all this apparently changed around 2 years ago and all their self employed instructors were told there was no change except that the studio would produce the invoices, but having seen what they are sending in this file I've been given, it just looked wrong to me.
To be clear once again, I've asked her questions to try and understand it and have come here to check there's not something obvious I'm missing that could have avoided the need for additional work, but I'm not going to advise on it nor am I doing any accounting. As I suspected she needs professional help.
Too many tangents. Acccounting wise, she should stick with her understanding of the contractual arrangement i.e. only include her view of turnover and expenses. The rest is a legal matter, specifically one of contract, with the side issue of whether the studio is suspected of doing anything dodgy. "Me personally", I would only waste time on it if either a) I wanted business from them in the future or b) it continued to worry me.
Edit: Tim, is she worrying, or are you on her behalf?
Too many tangents.
It's mixed metaphors, but that's what happens when Aweb is treated as a dog-grooming parlour. (And that's why it can never be one. IMHO.)
[I think I've flogged that particular horse enough now. The bee still buzzes in my bonnet, but (last one, appropriately canine) I'll stop biting your ankle about it in future.]