VAT Question - Surely This Can't Be Right?

zenmaster

I'm an IT contractor operating under the industry standard Ltd. Co. => Agency => Client model.

I have recently undertaken an overseas (EU) trip on behalf of the client. I, or rather my (VAT registered) Ltd. Co., had to fund the trip and claim back expenses from the client via the agency.

The agency sent me a very basic expenses form consisting of just 4 rows of 2 columns each, labelled item and amount. I filled this out with generic items - Flight, Hotel, Transportation and Subsistence - and the gross amount of expenditure for each. I also attached a breakdown spreadsheet itemising individual items, net cost, VAT and total amount.

They have now paid these expenses BUT ... they have taken the total (including local VAT) then added a further 20% VAT.

I can't see that this is right, as the VAT will have been paid twice (and includes VAT on VAT). Also some of the items such as the flight are exempt, but are all lumped into the total.

Am I correct?

bengalknights

Yes you are correct they have accounted for VAT twice

They should break down to VAT and Zero rate

WHA

No, they're right and you're not I'm afraid.

If your main supply is standard rated, then ALL associated costs, whether vatable or not, zero or exempt, are also VATable when you invoice your customer.

Where you are probably wrong is that you should recharge your NET amount of VATable items, so that the client pays net plus VAT.

So, eg, if your fee was £1000 for time, plus £100 flights (no vat to you), plus meals of £120 (£100 plus vat £20), then your invoice to your customer would have been:-

Time £1000, flights £100, meal (net) £100, total net £1200, plus VAT £240, total gross bill £1440.

http://www.hmrc.gov.uk/vat/managing/charging/disbursements.htm#2

zenmaster

bengalknights wrote: »

Yes you are correct they have accounted for VAT twice

They should break down to VAT and Zero rate

That's what I was thinking until ...

WHA wrote: »

No, they're right and you're not I'm afraid.

If your main supply is standard rated, then ALL associated costs, whether vatable or not, zero or exempt, are also VATable when you invoice your customer.

Where you are probably wrong is that you should recharge your NET amount of VATable items, so that the client pays net plus VAT.

So, eg, if your fee was £1000 for time, plus £100 flights (no vat to you), plus meals of £120 (£100 plus vat £20), then your invoice to your customer would have been:-

Time £1000, flights £100, meal (net) £100, total net £1200, plus VAT £240, total gross bill £1440.

http://www.hmrc.gov.uk/vat/managing/charging/disbursements.htm#2

Well, there's a thing!

Still, it keeps my accounting simple and I've made a small profit on the deal. There is such a thing as a free lunch!

Thanks for your help.

zenmaster

WHA wrote: »

Where you are probably wrong is that you should recharge your NET amount of VATable items, so that the client pays net plus VAT.

Uh Oh! I've just seen this bit.

In which case It makes my accounting complicated and I've probably made a small loss, as VAT in the country concerned is 25% and I'm on fixed rate.

WHA

zenmaster wrote: »

Uh Oh! I've just seen this bit.

In which case It makes my accounting complicated and I've probably made a small loss, as VAT in the country concerned is 25% and I'm on fixed rate.

Your client has paid gross plus VAT so you're in profit this time regardless. Some firms are happy to pay the gross plus VAT - others are more strict and will only pay net plus VAT. You're lucky that they either havn't noticed or don't care. Either way, this time, you're a winner if they've paid gross plus VAT.

Even if they paid net plus VAT, if you're on the flat rate scheme, you can't think about individual instances - you have to think of the bigger picture. You're giving up your right to claim input VAT on costs in return for paying over less VAT than you've charged. So, in the big scheme of things, you're making a profit overall. You have to take the rough with the smooth on the flat rate scheme and not get hung up on the small detail.

martindow

I think your expenses for meals, etc. in the EU country should be quoted gross as foreign VAT can not normally be reclaimed. If you booked your hotel through a UK company and paid UK VAT that would be reclaimable by you. Anything you paid for locally would not involve UK VAT.

InsideInsurance

You are actually providing a service not actually providing them a hotel room or a flight etc. Therefore the standard VAT rate should be applied to whatever you bill your client irrespective of the VAT status of what you bought to facilitate that service.

As to what you should charge your client for making yourself available in the EU for those days arguably is totally independent of the costs you incurred unless your contract stipulates otherwise. It is a standard B2B relationship, they ask you to go, you say how much you will charge, they decide if they accept it or not.

In reality in most cases you will base your cost on the price you are paying. If your contract allows you do it at the gross rate in which case you make your normal VAT profit from being flat rated. If your contract says it should be the net amount then you'll lose out slightly but then this is the idea of the flat rate scheme, that you dont look at a transaction level but at the bigger picture.

In most cases I agree with the either my clients or the guys I am sending over the world that the price that will be charged back to the client will leave me/ the other contract in a neutral position at a transitional level.

zenmaster

Nothing in the contract. I only went because the person originally down for the trip couldn't make it.

I will leave it as is for now, unless someone queries it.

As for the flat rate scheme, well that's just laziness on my part, I'm afraid.

Thanks for your help.

martindow wrote: »

I think your expenses for meals, etc. in the EU country should be quoted gross as foreign VAT can not normally be reclaimed. If you booked your hotel through a UK company and paid UK VAT that would be reclaimable by you. Anything you paid for locally would not involve UK VAT.

That's what I was thinking. Presumably I don't need to mention it on my VAT return?