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VAT when employees are paying for damage?

Should VAT be charged to employees when they are paying for damage caused to goods

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Main example is employee has an accident at work and is charged up to £1000 for damage to car. The repair would be done on site by other employees.

Not sure if the £1000 cap is relevant - could make it fall into compensation category rather than paying for repair.

The letter to the employee would detail cost for the repair including materials and labour and VAT would be added to the total amount. The deduction would be taken in installments from wages.

If there was no proof on who caused the damage, the vehicle would be repaired and no VAT would be charged until the vehicle is sold. However if the employee is paying for the damage VAT is charged, although nothing is actually supplied to the employee.

This is mainly for damage to cars for resale (sometimes not for resale and sometimes just for company property)

Replies (54)

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By David Ex
22nd Sep 2021 12:25

I’d say yes.

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By Leywood
22nd Sep 2021 12:34

The employee had 'an accident'. So why is he paying for damages? Why are you not claiming from insurance or just absorbing the cost?

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Replying to Leywood:
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By AngelAsks
22nd Sep 2021 12:42

It is in the employment contracts - if the employee was driving carelessly etc they will have to cover costs.
It is most cost effective to repair vehicle on site - this is the nature of the business

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Replying to AngelAsks:
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By Leywood
22nd Sep 2021 12:49

AngelAsks wrote:

It is in the employment contracts - if the employee was driving carelessly etc they will have to cover costs.
It is most cost effective to repair vehicle on site - this is the nature of the business

Driving carelessy is not 'an accident'.

You also stated 'if there was no proof'.

If it was an accident, then you could get a claim from the employee for wrongful deduction of wages and any personal injury suffered.

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Replying to Leywood:
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By AngelAsks
22nd Sep 2021 13:06

I mean.. no one purposely damages the car... unintentional/ accidental/ careless mistake?

If there was no proof obviously no one is charged - the company incurs the cost

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Replying to Leywood:
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By Paul Crowley
22nd Sep 2021 13:21

Truck acts and all that

I thought that this approach was now a forlorn hope for all but the Armed forces

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Jason Croke
By Jason Croke
22nd Sep 2021 13:10

If I understand correctly then :

If employee is deemed liable for the damage, rather than claim on insurance, the company charges the employee (upto £1k). In that scenario there is a supply of repair services from company to employee, and this is a standard rated supply. In effect, forget they are an employee, a repair has been done and someone is being invoiced for that work, so VAT applies.

If employee is not deemed liable, the company does the repair itself and suffers the repair cost, there is no supply here and no VAT applicable.

If we're using 2nd hand margin scheme, remember that the costs of bringing the car to sale are not included in the 2nd hand margin, but any input tax incurred on parts in repairing the vehicle are recoverable in full.

I don't see how the £1,000 cap has any relevance per se, it's not compensation (and under the new compensation rules it would likely be seen as an underlying supply of services anyway). Is the £1,000 cap linked to the insurance excess, eg company has to pay first £1k before it can make an insurance claim and so it's easier to bill the employee than make a claim.

Don't think it can be seen as a disbursement either as the excess would be the company liability and not the employees or the cost of repairs are for company benefit, not for the benefit of the customer (employee).

Are proper VAT invoices being issued to the employee or just a letter? How does the VAT get accounted for in the accounts, because for MTD, it looks like a supply has been made. Also, if employee paying in instalments, then how is the tax point being treated - VAT declared in full based on invoice date or in instalments based on payment?

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Replying to Jason Croke:
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By AngelAsks
22nd Sep 2021 15:34

Thank you for your helpful response!

As a business, we repair and sell cars. So no matter the cost of repair, we would do this on site and there would be no insurance claim made.
The £1k cap is essentially there to protect the employee - if repair costs anything above this, only 1k will be charged to the employee, including VAT.

There is no VAT invoice - just a letter detailing the cost and clause in the contract which makes them liable. This letter is signed by both parties. From my understanding, tax paint is when instalments are received (deducted).

It sounds like we need to charge VAT, but for me it doesn’t sit right that employees are being charged VAT and they are being supplied with nothing – it is a service that was going to take place regardless if the employee was going to help with the cost.

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Replying to AngelAsks:
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By Les Howard
22nd Sep 2021 17:04

I agree with Jason. And I understand HMRC would take the same view.
In other instances I have seen employers use deduction from salaries to secure the sums due. The trick is then to ensure the output tax is still accounted for.

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Replying to AngelAsks:
Jason Croke
By Jason Croke
22nd Sep 2021 18:54

The employees are being supplied with something...the repair. The employee could (in theory) get the car repaired using another reputable firm down the road and pay them direct for the repair and then present you with a repaired car.

I don't agree "it was a service that was going to take place anyway", car is damaged, you can't sell it like that so I appreciate it needs repairing, so yes, the work was going to be done anyway, but the charge to the employee is to replace lost margin by the company, for example car was bought for £10k and sold for £11k, but employee damages car, you now need to spend £500 on parts and so you still sell it for £11k but your margin is £500 less, unless you get that lost £500 from the employee....which is what you are doing, maintaining your margin but billing the employee. If there are no costs because its just a bit of paint and your body shop guy is paid whether he does a repair or not, then why bother invoicing the employees at all, just let it go? Indeed, why not employee people who can drive a car without damaging it :)

I have a lease car, if I damage it, I have to repair it else when it is returned, the lease company will charge me for repairs, even though I don't own the car and indeed the car has been returned so I don't even have the car but I'm still charged for the repair. Point is, if the car goes back damaged, lease company repair it and bill me and I have received a supply (them repairing it for me).

If there is no VAT invoice, how is output tax being declared, is it just a manual entry similar to road fuel scale charges/advisory fuel rates? I'm okay that the tax point each instalment/deduction.

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Replying to Jason Croke:
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By Bobbo
23rd Sep 2021 12:59

Jason Croke wrote:

I have a lease car, if I damage it, I have to repair it else when it is returned, the lease company will charge me for repairs, even though I don't own the car and indeed the car has been returned so I don't even have the car but I'm still charged for the repair. Point is, if the car goes back damaged, lease company repair it and bill me and I have received a supply (them repairing it for me).

Is this really that comparable a situation? With a leased car there is a legal agreement granting you use of the car which (probably?) contains terms detailing the expected condition of the car upon its return to the lessor. With OP's scenario, the interest of the clumsy employee in the damaged vehicle is not clear.

I couldn't see that OP had defined what sort of incidents are occurring that lead to such damage but I guess they could be put into three categories:
- damage caused when using vehicle for personal purposes (e.g. commuting using vehicle as their company car)
- damage caused when using vehicle for business purposes (e.g. on a test drive)
- damage caused to vehicle on dealership forecourt

I bow down to those with superior VAT knowledge but i'm finding it hard to see how the analysis of a damaged leased car would be the same as all of these.

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Replying to Bobbo:
Jason Croke
By Jason Croke
23rd Sep 2021 15:44

The example of the lease car was more to do with the OP saying that there was no supply being made to the employee. My point being that with a lease car you don't own it but you still have to pay for repairs after the vehicle has been returned and that is no different to an employee receiving a service for a car they don't own.

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Replying to Jason Croke:
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By The Dullard
23rd Sep 2021 15:52

But it is different. With the lease car, the car is being supplied by the lessor to the lessee for a consideration under a contract (or lease, if you will). The payment for the car repairs is additional consideration payable under that contract calculated by reference to the repair cost. There is no supply by the lessor to the lessee of a repair.

The employer has not contracted to make any supply at all to the employee. The opposite thing is happening.

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Replying to AngelAsks:
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By JohnStead
22nd Sep 2021 23:19

AngelAsks wrote:

It sounds like we need to charge VAT, but for me it doesn’t sit right that employees are being charged VAT and they are being supplied with nothing – it is a service that was going to take place regardless if the employee was going to help with the cost.

It doesn't sit right to me that employees are being charged at all (never mind the VAT) when as you say they are being supplied with nothing.

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By Paul Crowley
22nd Sep 2021 13:47

You have got to be kidding
Contract probably unenforceable
Illegal deduction every time at an employment tribunal
You could even face a penalty under the minimum wage regulations

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Replying to Paul Crowley:
Jason Croke
By Jason Croke
22nd Sep 2021 14:05

The Accounting sector is famous for paying for your qualification and then if you leave, having to pay it back, also I've seen some professional type firms charge employees for a new laptop/equipment when they've damaged the one they were given or failed to return the laptop when they've left the company.

I don't see much difference between that and an employee damaging company property such as a car. Not saying its right, that is what insurance is for at the end of the day, but of course a valid point re. deductions affecting minimum wage, etc.

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Replying to Jason Croke:
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By David Ex
22nd Sep 2021 14:32

Jason Croke wrote:

I don't see much difference between that and an employee damaging company property such as a car.

Pretty sure the last company car scheme I was in charged some kind of excess for driver fault accidents. They also charged to pass on parking penalty notices issued by car parking form bandits. It was, apparently, contractual.

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Replying to Paul Crowley:
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By AngelAsks
22nd Sep 2021 15:39

Paul Crowley wrote:

You could even face a penalty under the minimum wage regulations

A contractual deduction for conduct doesn't effect NMW. Please see:

NMWM11060 - Deductions and payments from workers: contractual deductions or payments - for conduct and discipline

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Replying to AngelAsks:
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By Paul Crowley
22nd Sep 2021 16:11

Needs to be BOTH contractual AND misconduct

NMWM11060 - Deductions and payments from workers: contractual deductions or payments - for conduct and discipline
Relevant legislation
The legislation that applies to this page is as follows:

* National Minimum Wage Regulations 2015, regulations 12(2)(a)
When considering contractual deductions and payments from workers it is necessary to consider both:

conduct and discipline, and
conduct relating to ‘any other event’ (NMWM11065).
Conduct and discipline
A deduction made from a worker’s pay or a payment made by the worker to his employer which is both:

a specified contractual liability of the worker AND
in respect of the worker’s misconduct (or something related to misconduct)
will not reduce national minimum wage pay.

The circumstances relating to the deduction or payment must be specified in the worker’s contract (i.e. the worker must be contractually liable) and the clause must be in respect of misconduct of the worker or a related matter, such as negligence. If a worker’s contract is amended to include a previously omitted entry relating to misconduct, then that entry may only be applied to misconduct events taking place after that contractual amendment was made.

Where deductions are being made from workers it is reasonable to expect the employer to provide evidence to a NMW Compliance Officer regarding the exact circumstances of such deductions. If an employer suggests that a deduction is stipulated as misconduct in a worker’s contract (written or otherwise) and the clause makes the worker contractually liable for a deduction, then it is reasonable to see some evidence to expressly support this.

Example 1 - A shop worker is contractually required to make good any shortfall from his till. The shortfall results from the worker’s negligence. Therefore, any deduction to meet such a shortfall will not reduce national minimum wage pay.

This can apply to a group of workers, for example, those who share a till, however the employer must be able to relate the deduction to misconduct.

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Replying to Paul Crowley:
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By AngelAsks
22nd Sep 2021 16:19

Paul Crowley wrote:

Needs to be BOTH contractual AND misconduct

it is.. thanks

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By Tax Dragon
22nd Sep 2021 15:56

Sounds like the £1,000 figure is VAT-inclusive and (unless repair costs are below this level) the employee is in fact no worse off for being charged VAT.

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Replying to Tax Dragon:
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By The Dullard
23rd Sep 2021 11:40

Whether or not the £1,000 is VAT-inclusive (which VATA 1994, s 19(2) says it is), the employer still needs to know whether or not to account for VAT (of £166.67).

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Replying to The Dullard:
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By Tax Dragon
23rd Sep 2021 12:09

Agreed. (And well expanded, thanks.)

You may have guessed that my comment was prompted by the OP's own (slightly odd, IMHO)* comment

AngelAsks wrote:

it doesn’t sit right that employees are being charged VAT and they are being supplied with nothing – it is a service that was going to take place regardless if the employee was going to help with the cost.

* Slightly odd, because (as JohnStead said), why is it just the VAT element that the OP is discomfited by? The VAT follows the charge on the employee - no charge, no VAT. But, as I say, no odds (VAT-wise) to the employee, if net costs >£1,000.

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Replying to Tax Dragon:
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By AngelAsks
23rd Sep 2021 13:06

The fact that employees are charged when they damage property is one thing that I have not commented weather I am discomfited with or not. However, let me point out every incident is heavily reviewed and employees are only charged when it has been proven that they have gone against instructions/ been careless or reckless etc

True that in excess of £1,000 the employee would be no worse off – but it is common for charges to be less than this, and the original question still stands either way.

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By lionofludesch
23rd Sep 2021 06:58

What has been supplied to the employee?

And why is he still working for these chancers ?

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By john hextall
23rd Sep 2021 11:27

I would say no. If you have an accident in your own car, there will be insurance but there is likely an excess to pay. This does not attract VAT. Similarly if you have an accident in a company car. In your example, the employer is simply avoiding the insurance company and doing the repair themselves. There is no cost to this because the mechanics are already employed, the idea of charging the employee is more akin to a fine for driving carelessly. This itself may be subject to challenge in an employment tribunal on various grounds. There is certainly no VAT invoice raised so where is the justification for charging VAT?

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By The Dullard
23rd Sep 2021 11:52

I disagree with Jason and Les. Indeed, in disagreeing with Jason, I am heartened by the fact that Les agrees with him.

In my opinion there is no supply of a repair to the employee. It is not the employee's asset that is being repaired and the employee has not sought or contracted for the repair. They are simply being required to contribute to the cost of the repair, at best. At worst, as others are taking umbrage with, the employee is simply being penalised.

Neither a contribution to somebody else's costs nor a penalty are consideration for any supply.

Just as when an insurer pays the costs of a repair, there is no supply to the insurer, they are simply contractually bound to compensate the insured for their loss (which is the cost of the repair net of any VAT that the insured can reclaim on those costs).

Jason likens it to a lessor paying for a repair of a car that is being leased, in relation to which there are two possible situations.

The first is where the lessor arranges the repair, in which case the lessor has entered into a contract with the repairer to have goods (that are not legally theirs) repaired. There is in that case a supply.

The second is where the lessor hands the car back damaged and the lessee has the goods repaired and requires a contribution from the lessor. In that case there is no supply of repairs by the lessee to the lessor; there is just additional consideration passing under the lease, calculated by reference to the cost of the repair.

In the employer/employee scenario there is no contract by which the employer is to make any supply to the employee; quite the reverse.

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Replying to The Dullard:
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By More unearned luck
23rd Sep 2021 12:39

Sorry for being pedantic, but you have used "lessor" and "lessee" the wrong way round.

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Replying to More unearned luck:
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By The Dullard
23rd Sep 2021 13:13

Yes. I'm prone to doing such things! I have got employer and employee right though!

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Replying to The Dullard:
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By lionofludesch
23rd Sep 2021 12:58

I agree with Dulls. If my car is repaired I have received a service. If someone else's car is repaired, I haven't

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Replying to lionofludesch:
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By Tax Dragon
23rd Sep 2021 13:13

But Jason's point about (the employee) being able to take the car elsewhere to get it repaired is interesting.

I break my car. Insurer says they'll get it fixed. They have an approved repairer. I never contract with that repairer. I just pay an excess to the insurer, who does so contract. Who is providing what to whom there? (I'm easily confused by that question... perhaps Justin was right.)

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Replying to Tax Dragon:
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By The Dullard
23rd Sep 2021 13:17

In the insurance situation the insurance company doesn't get it fixed. The insured contracts with the repairer, who must be on the insurer's approved list; and the insurer may put the insured in touch with the repairer.

That way the supply is made by the repairer to the insured and the insurer just pays all but the excess and any recoverable VAT, thus making good the insured's loss.

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Replying to The Dullard:
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By Tax Dragon
23rd Sep 2021 14:23

The Dullard wrote:

In the insurance situation the insurance company doesn't get it fixed. The insured contracts with the repairer, who must be on the insurer's approved list; and the insurer may put the insured in touch with the repairer.

That way the supply is made by the repairer to the insured and the insurer just pays all but the excess and any recoverable VAT, thus making good the insured's loss.

I was trying to remember. Haven't broken a car for a while. But we did have our front door kicked in more recently (you don't want to live where I live! :-)) - I remember we agreed to let the insurer instruct their approved kicked-in-front-door fixer to provide us with a new door. At least, I don't remember ever instructing the fixer directly and assume the insurer did. (But perhaps I did. I've had children since then and that doesn't do your memory of bad things any favours!)

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Replying to Tax Dragon:
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By The Dullard
23rd Sep 2021 14:43

Do you think the door fixer knew he was fixing your door, and not the insurance company's, that you were in want of having your door fixed, and that he'd get paid for fixing your door? That all sounds very contract like to me.

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Replying to The Dullard:
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By Tax Dragon
23rd Sep 2021 15:06

IANAL. IAIPNAPL. Is the front door mine? Or the mortgage company's?

Red herring.... but presumably so too was Jason's take-it-elsewhere-to-get-it-fixed comparison. The employee wouldn't really be able to do that, any more than the insurers can insist I use Car Repairs Done Cheap Ltd next time I do break the old jalopy.

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Replying to The Dullard:
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By AngelAsks
23rd Sep 2021 13:15

This was exactly my thoughts, however no one seems to agree. I think the way you have put it makes it very clear though!

Just to be devil’s advocate - say an outsider walked in to the showroom, damaged a car, admitted liability and told to/ agreed to pay for damage. They would be invoiced with for parts/ labour with VAT included, no? Is this really any different?

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Replying to AngelAsks:
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By The Dullard
23rd Sep 2021 13:23

It's no different, apart from the fact that you are raising an invoice for something that isn't a supply, and making them compensate you for your employees' time that you'd be paying for anyway.

There is no supply to the outsider. They are just compensating you for your costs in consequence of their actions. If you do the work, I personally would certainly take issue with paying any labour, although you might argue that your loss is their not being able to do work that can be charged for while they are working on the repair necessitated by my actions, which might be a valid point.

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Replying to The Dullard:
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By AngelAsks
23rd Sep 2021 14:05

It is true that it would be loss to the company if damages are not paid by the employee - the guys that fix the cars are busy so they would certainly be working on something that could be charged for if the incident didn’t happen. Also 9 times out of 10 there is also a cost incurred for materials.

However from the point you are making, the above is irrelevant? Still nothing is being supplied to the employee, and no VAT should be charged?

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Replying to AngelAsks:
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By The Dullard
23rd Sep 2021 14:38

Exactly.

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Replying to AngelAsks:
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By lionofludesch
23rd Sep 2021 17:01

AngelAsks wrote:
- the guys that fix the cars are busy so they would certainly be working on something that could be charged for if the incident didn’t happen.

How is that relevant to the VAT status of the transaction ?

"We're busy so we have to charge VAT ." Really ?

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Replying to lionofludesch:
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By The Dullard
23rd Sep 2021 17:07

It isn't. Angela is responding to the second part of my post of 13:23 debating the quantum of the loss as a result of the damage.

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Replying to The Dullard:
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By lionofludesch
23rd Sep 2021 17:11

The Dullard wrote:

It isn't. Angela is responding to the second part of my post of 13:23 debating the quantum of the loss as a result of the damage.

Ah right. Thanks for clarifying.

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Replying to lionofludesch:
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By AngelAsks
23rd Sep 2021 17:55

I clarified myself in the second paragraph - "the above is irrelevant"

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By Tax Dragon
23rd Sep 2021 12:14

@VAT bods... is there a distinction between
i) costs <£833.33, employee pays for (buys) repair in full, receives the supply of that repair and
ii) costs >£1,000, employer bears the costs, receives the supply, gets a contribution from the employee?

(I'm asking myself Lion's favourite question and confusing myself, I think.)

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Replying to Tax Dragon:
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By Tax Dragon
23rd Sep 2021 12:16

oh... Dulls may already be picking up on this point. Ignore me, I'll read and digest Dulls's answer.

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Replying to Tax Dragon:
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By Tax Dragon
23rd Sep 2021 12:27

(Actually, rereading the thread, I see Lion has already asked his question hours ago. It annoys me when people comment without reading the thread and just repeat some point already confirmed/refuted - and here I am doing exactly that. Apologies to you all. Including ALISK.)

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Replying to Tax Dragon:
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By The Dullard
23rd Sep 2021 13:25

No. In neither case is there any supply to the employee.

The employer (the who) is repairing their own vehicle, and not making any supply to anybody (= nobody, the whom).

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Replying to Tax Dragon:
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By lionofludesch
23rd Sep 2021 16:54

Tax Dragon wrote:

@VAT bods... is there a distinction between
i) costs <£833.33, employee pays for (buys) repair in full, receives the supply of that repair and
ii) costs >£1,000, employer bears the costs, receives the supply, gets a contribution from the employee?

(I'm asking myself Lion's favourite question and confusing myself, I think.)

If someone had answered the question when I asked it, the thread might not be so long.

Transaction 1 - parts company supplies parts to employer. Standard rated, input tax recovery in full, assuming fully taxable.

Transaction 2 - employer's own staff nail parts (or whatever - I don't know what they do in these garages) onto their own vehicles. No supply. No VAT. No VAT recovery.

Transaction 3 - employer recovers cost from employee under some dubious compensation clause in his contract. No supply. No VAT. No VAT recovery.

Job done.

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By More unearned luck
23rd Sep 2021 15:39

What happens when the dent the employee has made to the employer's car is matched by a dent in a third party's car? Or in the third party? Doesn't the insurer become involved at least in those cases?

The interesting debate about who is supplying what to whom shouldn't be necessary - your employer should stop being mean. I don't think that Lewis Hamilton has to pay Mercedes the cost of repairing his racing car if he crashes and he is at fault. So why should your colleagues suffer?

If it is lawful for the employer to deduct the cost from the employee's pay does it/should it come out of gross or tax home pay?

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Replying to More unearned luck:
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By The Dullard
23rd Sep 2021 15:41

Net pay. This doesn't qualify for salary sacrifice.

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