Company claiming VAT on freelancer expenses

[stories]

‘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.’

 

The whole tax system is for HMRC’s gain..... not yours or mine...

 

So I’m assuming you just took on the cost overhead of all the photocopying (maybe a small point but it’s a good example) you then had to do, so technically made a loss passing receipts on...... like that (personally I think that’s bum advice, as it looks like it was fond out, certainly in today’s world anyway)

 

S

[Simon Lewis]

Sorry I was misunderstanding what you meant.

 

Yes - If I was not VAT registered, I would be more expensive when I sell goods to my VAT registered customer. If I was just selling my time it wouldn't affect them. There is the small issue that some firms seem tempted to treat every invoice as having VAT on it... http://www.blue-room.org.uk/public/style_emoticons/default/smile.gif

[paulears]

I think we are missing practical side of this. I often get this kind of activity, and it's pretty simple to process. I'll use my own circumstances to explain how it works using two examples of the stuff I do. I work for a production company. They pay me a substantial amount of money into my bank account. I spend it on production costs, from pence to hundreds of pounds on individual items. I advance some to others and they source products and they give me the receipts. These get entered into a spreadsheet so I know when the money is running out, or more often should do, but end up using my money because I forgot to ask for more. Each entry has a corresponding receipt. Some are from non-VAT registered sources while others have the VAT number and details. These are passed on to the office and they reclaim VAT in the normal way. Many receipts are electronic nowadays, so I print out the receipt, and put it with the others. Perfectly legitimate and above board. However - as I am also VAT registered, the alternative system would be for me to reclaim the VAT, and tally up the receipts and issue an invoice, adding 20% VAT so the production company would then reclaim it.

 

I purchase an item for £120, I use £120 of the production companies money - they get the receipt, and the net cost to them once the VAT is reclaimed would be £100.

 

The alternative would be for me to enter the receipt in my accounts - £120, but I would reclaim the VAT, so it would cost me £100 net. I then invoice it for £100+VAT = £120. They then reclaim the VAT leaving £100 as the cost.

 

That makes no difference. However - how about if I pay out the £120, put the receipt into my accounts, leaving me the net cost of £100, but I then send on the second print of the original receipt? The production company can then also claim back the £20 VAT, leaving them with a net of £100 too! The receipt is a kind of £20 voucher that would be used just once. Once I have claimed it, the receipt is null. Clearly the VAT people would have no real way of checking this, and I'm sure it's some kind of real criminal act - fraud, or some other similar thing.

 

If you, as the freelancer/contractor or whatever are VAT registered and 'use' the receipt in your accounts, then the client cannot also use it. They want the receipts to be able to claim back the VAT as the end user. You of course, want exactly the same thing. You cannot do this but you have the receipt and they don't. In essence - somebody in the chain gets to claim back something.

 

Clearly the sensible thing to be 100% correct with the VAT people is to invoice your out of pocket expenses to the production company. If they insist on having receipts, then you have to fund all these things if you don't have an advance as a money buffer. So spending your own money on the job, then after invoicing and waiting, it gets replaced - with you perhaps paying interest on the credit card you used?

 

I guess this is just one of those negotiation in advance with written agreement things. I'm happy when they give me an advance. On jobs where I fund things myself, then my expenses section on the invoice may not be exactly the prices I actually paid - I don't want to make a profit from expenses but I certainly don't wish to lose on the arrangement.

 

Apart from the usual solicitor payments made as disbursements, the only time I see the word used is in split cost arrangements where one party is VAT registered and the other party frequently not. As an example, a local place split hire space. Maybe a dance teacher wants to run a Zumba class, the room owner and the dance teacher split the income 50/50. It's easy if they are not VAT registered, but if the space owner is, and they issue a receipt, then if the room generates £120 for the hour, the Government take £20, and the dance teacher gets £50, and the owner gets a net of £50. The dance teacher, being a dancer is confused as to how 50% of £120 is £50. Often I see them use disbursements. The £120 received is split in two, leaving £60 for the space owner, who then itemises the £60 as having £10 VAT content, which works for both parties. The owner collected more money but the disbursement works for passing part of it on to somebody else. The split effectively done before the VAT stage.

 

I liked the comment about phoning up the VAT people. I have never ever had a straight answer when you do this. You call, and they listen and ask sensible questions about the query. They then ask if you have read VAT 234, or other similar document. Usually I have, and still can't decide what the correct solution is? This is often as far as you can go - they will not say yes you can, or no you cannot. They will as people have done in this topic - refer you to the appropriate statement, and it's up to you to interpret and decide what to do. If you say "So - this means that I should do X, then do Y - that's right, isn't it?" They will not respond with a categoric answer. It isn't how they work. You make the decisions, they decide if your decision was appropriate. My own sister was a tax inspector for years, and she would never give me an absolute answer to anything. All she said was NEVER phone up with a query that makes us get your records out. She explained that they're so busy and stretched that if anyone did finish one case, and was looking for another, rather than waiting for one to be officially allocated, they'd just use ones that were waiting to be refiled.

[stories]

I think it the case of the op’s question, it is quite clear where their VAT liability lies and the VAT help line would be able to clarified that 100% (well 99% they will never give a 100% answer as pail says)

 

(I compleatly agree about probably all or most of all other tax queries, as only a court of law can really give a qualified and binding yes or no o tax questions).

 

When had a VAT inspection, the chap wanted to see where I had received Payments for invoices (for sales) and also where I had paid out (for purchases). You would have a job doing that with a receipt from a freelancer... where the freelancer had made the purchase... that’s how they would (or could, they would have to get lucky to a degree and pick the right receipts to check).

 

I personally think the point been missed is that the ‘freelance’ is a separate business, out to make a profit so why should they not be adding a margin on to ‘expenses’ or things they purchase themselves and are to be billed on, to cover costs if nothing else, if thy so wish i.e. be treated as a business rather than as an employee?!

[jbaileypro]

Hi guys,

 

I've been away on holiday since my first post but have been reading all the replies via email. I'm going to speak the company in question and check they have thought it through fully. I think it may be more due to the book keeper asking vs a trained accountant.

 

I'm happy with the arrangement as I am not out of pocket at the end of the day but at the same time want to make sure I will not get in trouble myself. I know one the managers well and will have a sit down with them to talk it through.

 

I'm glad that this thread has got some traction as I find a lot of people are quite hush about money and expenses. It has been a nice insight to see so many different arrangements that can work.

[sunray]

'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.'The whole tax system is for HMRC's gain..... not yours or mine...So I'm assuming you just took on the cost overhead of all the photocopying (maybe a small point but it's a good example) you then had to do, so technically made a loss passing receipts on...... like that (personally I think that's bum advice, as it looks like it was fond out, certainly in today's world anyway)

I fully accept that I have expenses which I am unable to claim back from someone else, PPE, postage & stationery for example. Each year when I complete my annual accounts I look at these costs and add them to my 'proposed income' for the following year and set my hourly and day rates accordingly. Yes I do 'make a loss passing receipts on' but that cost is budgeted into my rates.

This means that all of my customers end up paying for these costs even if they are not involved with VAT or paying for materials from me.

I do not account for every single penny or allocate it to the appropriate job, that would be far too time consuming and expensive to manage.

[themadhippy]

I fully accept that I have expenses which I am unable to claim back from someone else, PPE, postage & stationery for example.

so your not "claiming" these back from the tax man ? All the above,according to my financial guru are legit business expenses that can be put on your tax return

[paulears]

If an expense is a legitimate business expense, then it doesn't matter if you swallow it or add it to an invoice. You spent the money, that's the important thing.

[stories]

'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.'The whole tax system is for HMRC's gain..... not yours or mine...So I'm assuming you just took on the cost overhead of all the photocopying (maybe a small point but it's a good example) you then had to do, so technically made a loss passing receipts on...... like that (personally I think that's bum advice, as it looks like it was fond out, certainly in today's world anyway)

I fully accept that I have expenses which I am unable to claim back from someone else, PPE, postage & stationery for example. Each year when I complete my annual accounts I look at these costs and add them to my 'proposed income' for the following year and set my hourly and day rates accordingly. Yes I do 'make a loss passing receipts on' but that cost is budgeted into my rates.

This means that all of my customers end up paying for these costs even if they are not involved with VAT or paying for materials from me.

I do not account for every single penny or allocate it to the appropriate job, that would be far too time consuming and expensive to manage.

 

I think the issue really is that our 'expenses' are usually part of the job cost (as an AV freelancer, per OP), same as PPE, Stationary, training, accountants fees etc and should really be part of the originally quoted amount, not additions. However the way it seems to work in practices in most cases is that we never get enough information to quote properly, thus work on the basis of 'day rate' plus we will bill on reasonable costs incurred. Which tends to work and we are happy with most of the time. Personally if a client requires more than 'standard' PPE (i.e. steel toes, hard hat, High-Viz) or basic tools and wanted something more specialist, then I would expect to be charging something in my fee to cover costs of, same as if there client asked them to say add another laptop on, they would most likely charge for it I addition to there quote.

 

The AV company your working for then cherry picks what is best for them (from the sub-contractor or employee tree) and tries to treat the 'freelancer' like they would an employee and ask's for copies of receipts and things billed on at cost and only if actually incurred. Rather than doing some home work as to what is 'reasonable' for say parking at or near venue X for the duration of the engagement and using that to assess if the sub-contractor is 'taking the piss' or not with what they are then asking. It's a bit of a funny one though as it's kind of like quoting post job and obviously open to abuse/maximisation of profit. Depending where you sit on the fence... tricky as if you had originally quoted to include worst case for say parking at 45/day for 3 days and managed in the mean time to find something cheaper at 20/day, you wouldn't then go back to the customer and say 'oh, I got my parking for half the price so I've adjusted my original quote, you've already accepted, down a bit and invoiced you less' . That would just be business.

 

Very blurry line we have between temporary employee and sub-contractor (imo)...

 

Also a very different situation with say Paul, who sound like he is providing a service where he is sourcing resources and materials for his customer and they are providing cash advance for, I would think his situation in that example is a bit beyond the scope of a purely 'freelance' engagement the OP is asking about, where it's just a person and a tool kit turning up to site for 1 or a few days on a job and the 'expenses' relate to things that really should have been quoted for (imo) and maybe a emergency purchase while on site to 'get out of the brown stuff'. Again a blurry line (imo).

 

 

s

[sunray]

I fully accept that I have expenses which I am unable to claim back from someone else, PPE, postage & stationery for example.

so your not "claiming" these back from the tax man ? All the above,according to my financial guru are legit business expenses that  can be  put on your tax return

 

I can't claim the expenses from HMRC but of course I do include them in my tax return to offset against my income, effectively getting a 20% 'refund' or whatever the rate is at the moment.

 

If an expense is a legitimate business expense, then it doesn't matter if you swallow it or add it to an invoice. You spent the money, that's the important thing.

Sometimes, in amongst all the carefully crafted comments, going into great detail there is a simple little reply which sums up the situation so nicely.

 

Now where is that 'like' button?

 

Wow many comments.

I think the issue really is that our 'expenses' are usually part of the job cost (as an AV freelancer, per OP), same as PPE, Stationary, training, accountants fees etc and should really be part of the originally quoted amount, not additions.  However the way it seems to work in practices in most cases is that we never get enough information to quote properly, thus work on the basis of 'day rate' plus we will bill on reasonable costs incurred.  Which tends to work and we are happy with most of the time. 

In my situation I have encountered the 'Here is a box of bits go and make it work' situation on a regular basis and have frequently found the selection to be inappropriate/unsuitable far too often. As such I've found it easier to either provide the list of bits or to source them.

   Personally if a client requires more than 'standard' PPE (i.e. steel toes, hard hat, High-Viz) or basic tools and wanted something more specialist, then I would expect to be charging something in my fee to cover costs of, same as if there client asked them to say add another laptop on, they would most likely charge for it I addition to there quote.

Quite right.

The AV company your working for then cherry picks what is best for them (from the sub-contractor or employee tree) and tries to treat the 'freelancer' like they would an employee and ask's for copies of receipts and things billed on at cost and only if actually incurred.   Rather than doing some home work as to what is 'reasonable' for say parking at or near venue X for the duration of the engagement and using that to assess if the sub-contractor is 'taking the piss' or not with what they are then asking.  It's a bit of a funny one though as it's kind of like quoting post job and obviously open to abuse/maximisation of profit.  Depending where you sit on the fence... tricky as if you had originally quoted to include worst case for say parking at 45/day for 3 days and managed in the mean time to find something cheaper at 20/day,  you wouldn't then go back to the customer and say 'oh, I got my parking for half the price so I've adjusted my original quote, you've already accepted, down a bit and invoiced you less' .  That would just be business.

Having built up excellent working relationships with a selection of companies, they generally let me get on with it and wait for the invoice at the end. VAT receipts are of little interest to me as I'm not VAT registered, I do of course show them in my accounts listed as expenses. The P.O.s have a selection ways of indicating they are expecting the additional expenses. Having said that I'll quote a day rate which includes my time and the usual disbursements such as incidentals, travel and parking etc.

Very blurry line we have between temporary employee and sub-contractor (imo)...

In my view I have no confusion over this, when working for a company I am a Self Employed, Sole Trader, Sub Contractor. From my 'Employers' point of view I am aware it gets complicated but I've always had enough different 'Employers' during the year to keep it sorted. When I'm doing a job under my own steam I'm a self Employed Sole Trader.

Also a very different situation with say Paul, who sound like he is providing a service where he is sourcing resources and materials for his customer and they are providing cash advance for, I would think his situation in that example is a bit beyond the scope of a purely 'freelance' engagement the OP is asking about, where it's just a person and a tool kit turning up to site for 1 or a few days on a job and the 'expenses' relate to things that really should have been

quoted for (imo) and maybe a emergency purchase while on site to 'get out of the brown stuff'.  Again a blurry line (imo)

The circumstances are very different but I am, very many ways, working to the same sort of conditions and understand his problems and decision making needs..