Company claiming VAT on freelancer expenses

[Brian]

...I usually have to pay for multiple people's expenses on site...

 

That might open up a whole world of (employment status) pain.

[stories]

Did you pay VAT on the items you invoiced the client for? Why shouldn't they claim back VAT when you in effect charged them VAT?

 

As long as you are getting back what you pay out then it is no skin off your back, is it?

 

 

Eerr because THEY haven't PAID any VAT!

 

The OP has paid the VAT, not the company he is subcontracting to.

 

 

So how would his client show they have paid for the items and paid any VAT? They can't because they haven't, they only have his invoice, which is not a VAT invoice as he is not VAT registered...

 

 

hehehe that's funny... getting back what he paid for when passing on at cost... anyone else would put a margin on supplied goods, even its just to cover costs, except for us AV 'freelancers'.....

 

s

 

A client of mine requests receipts for any expenses that I have made during during onsite work. I originally thought that this was due to making sure freelancers weren't over-claiming for expenses. I usually have to pay for multiple people's expenses on site (mainly their own employees) if a company credit card hasn't been provided. This can add up quickly if its dinner for a few crew.

 

I recently found out that they were claiming the VAT back on the expenses and receipts I was sending through to them. I put these expenses on the invoice with the rest of my bill (but itemised for each expense).

 

I didn't think they would be able to claim the VAT back due to:

A - purchasing the expense on my own personal business account

B - putting these on the final invoice to them (I am not VAT registered myself)

 

I know that the company should provide a credit card for expenses on site which would bypass any issues. I have also had other freelancers recommend that I should just be putting my expenses as just one total on the invoice (possibly a total for each day).

 

Has anyone else encountered this situation?

 

Thanks,

 

 

Yes I have, company I only do a few jobs for so I told them I wouldn't be providing receipts and didn't. My view been that if it came to court to recover the debt they would have a hard job explaining why they had withheld payment pending copies of receipts and any half decent legal beagle would tie them in knots trying to explain that one. More so if HMRC were invited to sit in...

 

 

They are been naughty! Chances are there is someone in there accounts department that doesn't know there a$$ from there elbow (my experience) and they think they are 'doing good'.

 

imo it's also naughty 'checking freelancers are not over claiming expenses' there should be room for a margin, if only to cover costs.. If a company is worried about getting 'over charged' they should be providing whatever is been charged as expenses... (bet they will suddenly realise it's cheaper to just have it added than sort in a lot of cases... otherwise they would have...).

 

 

You need the receipt for your records. If you can't account for the expenditure then that will then become part of your taxable profit, effectively becoming something like 29% more expensive (income tax + NIC contribution, both classes.. inc the one the self-employed get stung for that pushes up the tax bill). Your also adding to your accounting over head, paper work to store etcetc all adds up. So YOU are then undercharging for whatever it was as it's thus costing you money.. yet your at the bottom of the pile and have no real 'profit margin' to be able to absorb that.

 

 

Question: So why should the 'AV freelancer' not be charging a margin on top? And why should they be asked to provide receipts? Your plumber wouldn't show you his receipts from his trade supplier for your new bath and the plumbing.....

 

 

Obviously an 'all inclusive' quote should have been provided, but whoever gets enough details about a job to do that? we generally work on a give and take relationship with our clients where they have a basic 'day rate', turn up on site with little or no information and expect a they few extras (like mileage, parking) where they are required (like where they haven't pulled there own finger out and organised parking on site, sorted food etc..and haven't provided details to add that to the 'quote').

 

 

Unfortunately the line between employee and sub-contractor in this game is very blurred because a lot of the time 'AV freelancers' really are temporary employees called apon only when companies are busy and need extra skilled labour and treated as such. Most companies I have come across seem to do, and not to really understand what a sub-contractor is and how they should be engaged etc

 

We put up with it because we want the work, like the flexibility (, some people just don't know any better, think its good pay or don't think about benefits employees get out side of a pay-packet: Gym, healthcare, pension contributions etc) and don't want to rock the boat unless we really have to, the companies do it because it's far more cost & tax efficient for them (/until the taxman, if ever, catches up with our little industry) = more profit for them....

 

 

For the point about buying for the rest of the crew, if you were adding a profit margin, then that could be a good argument to HMRC as to why you have done that:, You have seen an opportunity for some extra revenue.

 

 

Had a new company come to me recently, asked me if I was free for a job, sent me a few docs over, there T&C's, how they engage freelancers (all about all in quotes etc all to try and make it look to the tax man like they are engaging sub-contractors) etc, then in the next breath ask for a 'day rate'.......... Genius...

 

 

s

[kerry davies]

The OP did not ultimately pay the Vat he acted as an agent and passed on that Vat for the client to pay. To me that is questionable but not important. What is important here is the difference between "expenses" and "costs incurred on behalf of a client".

 

Expenses were what I incurred as a necessary cost of doing business and I could claim against tax for most of those. I never, ever itemised these expenses on an invoice to my client, my business absorbed them.

Costs incurred on behalf of and reimbursed by the client are a zero sum item which I cannot claim against my business. Passing on the VAT receipts are "proof of purchase" which my VAT registered clients could claim against and/or claim against their business tax.

 

Where the OP went wrong I believe was adding these costs as items on an invoice for work he was charging for. In my case that was a no-no without a Purchase Order covering the amounts. So I handed over small receipts for petty cash payment and large items I invoiced for separately with "proof of purchase" receipts. Vat receipts were worthless to me or my non-registered business, why not keep the client happy?

[stories]

The OP did not ultimately pay the Vat he acted as an agent and passed on that Vat for the client to pay. To me that is questionable but not important. What is important here is the difference between "expenses" and "costs incurred on behalf of a client".

 

Yes he did. He purchased good / services, NOT his client. He may have billed his client for these and at cost, but HE purchased them, not the client..... I'd suggest you ring up the HMRC help line and get there view if your unsure about that, they are quite clear about that part of VAT....

 

You can't act as an agent an 'pass the VAT on', you'd have to be VAT registered to play pass the parcel with the VAT... Amazes me how smart people don't get this $h!t...

 

 

It would be a different story if he had received cash and it wasn't invoiced, while not at all above board, there wouldn't be a paper trail and he would not have put through his books so ultimately wouldn't incur any tax or much in the way of indirect costs.

 

 

I think the important thing here is the difference between a Sub-Contractor and an employee. You seem to be inferring he is an employee and not a subcontractor in what you are saying, while the company is enjoying the tax benefits of a sub-contractor, which stinks of 'having cake and eating it'.

 

 

The big problem I see (in the AV industry) is companies/people expect subcontractors to behave as employees (when it benefits them) and not as a separate business providing a service (unless it benefits them) and trying to make a profit (surly that's the point of a business..), if a business incurs a cost and passes on to the client it is generally not expected to do that at cost... Unfortunately employees at companies (like the accounts bods) tend to look at it and think 'oh your earning a lot more than me...' which is not the case at all, the bit they see might be similar, but they don't have to worry about things like accounts, pension payments, PLI, purchasing tools, ppe etc, sick pay, making a profit & staying in business etc... They rock up at 9am, make coffee in someone else's kettle, sit at someone else's desk, dream about there next holiday and knock of at 17:30...

 

 

Expenses were what I incurred as a necessary cost of doing business and I could claim against tax for most of those. I never, ever itemised these expenses on an invoice to my client, my business absorbed them.

 

That's fine in theory, but do you ever get to provide an 'all in' quote and get sufficient information to (for labour only services, different ball game if supplying equipment to as people tend to need to talk more in depth about a job at that point and will take the time to)?

 

 

 

Costs incurred on behalf of and reimbursed by the client are a zero sum item which I cannot claim against my business. Passing on the VAT receipts are "proof of purchase" which my VAT registered clients could claim against and/or claim against their business tax.

 

Not sure a business can incurred costs on behalf of a client, at that point you are supplying goods or a service to them, again you sound mighty like an employee there.....

 

Anything going though your books will need to be accounted for (YOU need the receipt for, not them, otherwise it will be claimed for twice... once in your accounts and once in theirs**), even if you are passing on at cost (which infact will be a loss, unless your time had no value, don't pay an accountant and they pay before any interest would be due), as you will need to claim the cost as a business expense otherwise your are providing them out of your own pocket.. not the business... (see below about passing on VAT receipts) at which point you would also be paying income tax and NI on, so making a hefty loss on.

 

** In your example have YOU put the whole value of the invoice/receipt through your accounts, inc the 20% VAT and claimed tax relief on the full amount against YOUR earning/profits? And they, your client, has (fraudulently) tried to recover the VAT element too? So then the tax man has lost out on tax on your profits on that 20% AND they, your client, have had it back to..?! Or have you swallowed that 20% for them and paid your tax on it as part of your profits (Your a stand up guy if you have and I'd love to book you for a few jobs asap, preferably before the end of the tax year, whats the limit on your credit card!!: O P )?

 

 

 

Where the OP went wrong I believe was adding these costs as items on an invoice for work he was charging for. In my case that was a no-no without a Purchase Order covering the amounts. So I handed over small receipts for petty cash payment and large items I invoiced for separately with "proof of purchase" receipts. Vat receipts were worthless to me or my non-registered business, why not keep the client happy?

 

 

Because THEY are committing fraud.... I totally see your point and if the tax system worked on commonsense and good will that would be fine... but at the end of the day it doesn't and the law of the land is quite clear on this point (about the only bit of tax law that is..), the Tax is levied when money changes hands. They are claiming they have paid for something (with a VAT element) and haven't, they are reaching in to the VAT mans pocket effectively and he doesn't like that. The VAT is paid by the consumer, in this case the non-VAT registered business entity that is the OP, at that point it can not be reclaimed further down the line. So the VAT man has made his 20% from the OP's purchase as the law says he can, and the company is then trying to pinch that back from him, which is then fraudulent.

 

If the company had paid for it directly themselves then yes, that can get the VAT back all above board. That's just the way it works and the odds are stacked in the tax mans favour...

 

Where the OP went wrong imo is working in are cooky messedup industry.. Where we ('freelancers') claim to be sub-contractors to keep our clients happy and maintain our own flexibility, but are really treated as employees most of the time by our clients (as your thinking proves).

 

I don't see a problem line iteming things like that personally. It's generally accepted, in my experience anyway, that we quote a 'day rate' and clients expect a certain amount 'expenses' that make up the final figure, where required, like car parking, travel etc. They obviously charge out our services at more than we charge and have a rough idea what it costs for a given job to get crew to/from site, feed, accommodation etc to be able to budget. so they have accounted for in a broad way and then that removed the admin over head of gathering individual quotes and in a lot of cases (again in my experience) of working out what exactly is going on to be able to provide enough information to each sub-contractor to even get a vaguely accurate quote from them and then sort all the admin that also creates out. Most of us bill things on at cost so they win there too, they haven't had a worst case quote regardless of actual cost.

 

 

Obviously most of us only bill things on at cost and want to show that we are not 'over charging' (or god forbid putting a margin on), so line item any additional expenses to try and give a little transparency to our clients, rather than just bumping up the figure with no explanation.

 

 

s

 

'Disbursements' is the term I think that needs to be used, but I don't think anything we would do as 'AV freelancers' would really come under that tho and I think it's related to VAT invoices, not a no-vatted business (you'd need to ask you accountant).

 

 

Some reading (just from a quick google, I make no claim to its validity, do your own research etc etc):

 

https://www.contractorcalculator.co.uk/charge_contracting_expenses_back_to_client.aspx

 

http://www.tbdaccountants.co.uk/uncategorized/disbursements-costs-pay-behalf-client-vat/

 

https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers

 

 

 

s

[Andyb]

I'm with Kerry Davies on this.

 

The official government link Stories gives also fully supports this rather than his own understanding.

 

https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers

 

This is giving examples of two vat registered companies trading but is easily interpreted for non vat person / company.

 

What I think everyone learns from this thread is we should be using the term disbursements when passing on costs purchased on behalf of a customer. As long as only one person / company claims the vat, or offsets expense against tax, all is well.

[Simon Lewis]

...This is giving examples of two vat registered companies trading but is easily interpreted for non vat person / company.

 

No - I would say that can't be argued for the non VAT registered company.

 

That link explains a method whereby you can exclude some items from your own VAT calculations to make the VAT accounting/paperwork just a little easier. It only works if you are VAT registered and it is advice given in 'how to account for VAT' section.

 

As 'Stories' explained in the post above you can only start playing with VAT if you are VAT registered. If you are not, you are a consumer (even as a business entity) and the VAT bill stays with you. You buy something and you pay the bottom line of the invoice - you cannot deal with the VAT separately. You sell something on and there is no VAT involved - as you cannot charge VAT.

 

This is the whole fundamental basis on how VAT works. It's a tax on the consumer, and the only way to not be a consumer in the process is to be VAT registered and do the work of charging tax on behalf of the government.

 

 

 

[Junior8]

It all depends who the final consumer is and what they are consuming I suppose.In theory the only person not allowed to reclaim the VAT is the person who buys the final product ie the concert goer or the theatre ticket buyer. The contractor who buys a box of bolts is it seems to me arguably merely part of the production process as are the components he buys.

[Jivemaster]

When a non registered entity buys an item, the VAT they pay becomes fixed to the item and cannot be reclaimed anywhere by anyone.

 

If a registered entity buys an item, the Vat charged is reclaimable.

 

The difficulty with the OP's example is that the articles were invoiced by a non registered company to a registered company.

 

IMO

If the articles pass through your books then you need the receipts for book keeping and must sell the items at a fixed price.

If the articles are bought on your work provider's petty cash and carried in your van then they want the invoices for book keeping and can reclaim the VAT.

[Simon Lewis]

It all depends who the final consumer is and what they are consuming I suppose.In theory the only person not allowed to reclaim the VAT is the person who buys the final product ie the concert goer or the theatre ticket buyer. The contractor who buys a box of bolts is it seems to me arguably merely part of the production process as are the components he buys.

 

Not as far at the VAT man is concerned.

 

It is the first non VAT registered buyer who swallows up the cost of VAT. That may well be the final consumer buying show tickets but it can be the first person in the supply chain. If I'm self employed, not VAT registered and I buy a box of bolts, I pay for the cost of the bolts and the VAT the bolt seller charges (if the supplier is VAT registered). When I sell the box of bolts to my customer I can charge whatever I like (and will no doubt add a mark up). What I cannot do is charge VAT on my invoice, nor can my customer (if VAT registered) attempt to reclaim VAT from my invoice. To try and do so is fraudulent.

 

 

In the OP's case, were he an employee of the company, it could be argued he buys goods or services on the company's behalf and therefore the company (if VAT registered) can reclaim the VAT (and give him the petty cash). However, he's not an employee and that receipt belongs to his purchase as part of his business on which he can't reclaim VAT but can offset as expenses (within the allowable expenses rules).

 

This is one of the reasons why being registered for VAT, even if you do not exceed the threshold, can be advantageous if your customers are also VAT registered. If they're not, you are just 20% more expensive.

[stories]

There is no theory about it, the first person who is not VAT registered pays the VAT. You can’t play past the parcel with it if your not VAT registered end of.

 

The tax man wants his cut.....and at the first opportunity.

 

I also don’t think there is much if anything we as AV freelancers would buy on behalf of a client that we are working for that we wouldn’t then use ourselves on a job (why would we be buying somthing on behalf of a client otherwise?!) in some way, or fall foul if the other qualifying criteria, so I seriously doubt we could consider anything a dispersement.

 

It’s aimed at things like fees payed on behalf of a client by a solicitor or somthing like a domain name a web developer would pay for on behalf of a client, not buying a box of earth bonds because the company forgot to send any to site or dinner ....

 

I would say anything we would buy on behalf of, is in fact supply of... or a cost of our doing business which we need to include in our backward quote, because we don’t generally provide an upfront all in quote for the job, because we don’t have the info to do that before hand..

 

So back to the original question: no they shouldn’t be doing that and you need the receipt for your accounts ( I find most companies see sense once you come back to them with a sensible well researched answer based on the law.... I had to explain the law on VAT invoices to one company’s accounts people once...... that shut them up rather quickly..).

 

Interesting topic and always interesting to see people’s view points on such things!

 

S

[timsabre]

This is one of the reasons why being registered for VAT, even if you do not exceed the threshold, can be advantageous if your customers are also VAT registered. If they're not, you are just 20% more expensive.

 

This is a deviation from the original question, but this is only the case if you are selling stuff to them that you've bought. If you are just invoicing them for your time, it makes no difference.

 

[Paul TC]

This is one of the reasons why being registered for VAT, even if you do not exceed the threshold, can be advantageous if your customers are also VAT registered. If they're not, you are just 20% more expensive.

 

This is a deviation from the original question, but this is only the case if you are selling stuff to them that you've bought. If you are just invoicing them for your time, it makes no difference.

 

VAT is on the supply of goods and services, your are providing a service to the client, even if is yourself, hence some small builders in the past having several trading companies to get under annual VAT thresholds in each company.

 

 

Or did my accountant give me duff info for 20 years ?

[Simon Lewis]

[Or did my accountant give me duff info for 20 years ?

 

Unless they are completely separate legal entities and demonstrably different in what they do, you are not allowed to run two businesses simply to evade tax or avoid registering for VAT. You would be expected to combine the sales and be judged on that as to whether you should be VAT registered.

The example of a builder having multiple companies to avoid tax would seem to be a prime example of evasion (in HMRC's eyes).

 

 

 

 

 

[timsabre]

Sorry I was misunderstanding what you meant. I was thinking if you are not vat reg but your customer is, selling gear you've bought does make you 20% more expensive since your customer cannot claim the vat back and neither can you. But charging for your time doesn't have to be more. That's actually the opposite of what you were saying.

[sunray]

Following a 4th redundancy and 'assisting' the administrators I found myself SE in 2005 without planning to do so. At that time I knew nothing of SE status, so visited my local tax office for advice.

 

In the circumstances of OP I was advised to keep a photocopy of receipts and append with 'expenses for xxx job for xxx employer and my invoice number' then invoice as 'expenses' and include the receipt reference details. That way the expense and income balanced out and became IC tax neutral. My accountant for the first year endorsed the process.

 

In 2012 I ran into a problem with HMRC as I was claiming income in the year of invoice rather than in the year of payment (as approved by original tax office chat and accountant) and that was the first year the declared CIS deductions appeared to have an error in my favour rather than theirs.  I had to provide copies of all 7 years of my invoices and accounts and after reassessment by them I was instructed to claim income in the year of payment.

 

They recommended that I retain my original receipts and invoice my expenses at a profit but the guy was quite candid that it was purely for HMRC's gain.