VAT with a non-VAT registered middleman

InsideInsurance

A little bit of a complicated setup but just want to get others opinions on VAT and effectively disbursements.

There are 3 or 4 parties involved in the process.... multiple product providers (all VAT registered), a client (VAT registered) and a middleman1 (not VAT registered). There is a second middleman2 that is VAT registered that is willing to be involved for a relatively small fee if it can help.

So the Client, contracts a number of services from the non-VAT registered Middleman1, one part of that is the sourcing and supply of goods to their customers.

The Client does want the services of Middleman1 and not to deal with all the product providers directly and Middleman1 obviously wants to maintain their cut too which they manage to do by keeping as many of the services inhouse.

Obv at the same time Client wants costs as low as possible. Cost of goods/ materials are passed on at cost and agreed service charge added.

Now the problem is that the Middleman1 isnt VAT registered and isnt willing to/cant be.

Is there anyway to pass the costs of the VAT incurring items to the Client to enable them to recover VAT from them? My understanding is that by passing them through the non-VAT registered entity the VAT is effectively stuck

paddyrg

People here often advise against VAT registration for lower turnover companies, but this is a prime example of where it makes sense.

How about if Middleman 2 manages the whole contract and transaction, simply paying a commission to MM1 for the introduction?

But be wary that if I was going to craft an advance fee scam, that's pretty much what it would look like, so MM2 should keep their eyes open.

InsideInsurance

The company's main activities are actually VAT exempt and so even if they were to VAT register they'd only be able to recover a tiny proportion of the VAT so it doesnt help

The whole contract goes beyond the scope of just this part but this part is a fairly profitable bit from a fees perspective. It is intrinsically linked to the other part so not feasible to carve it out

Mistral001

I think I know what this one is about insideInsurance.


They send the customer a bill for VAT if the customer is registered for VAT. (ie. the VAT only that they have been charged by the supplier). A bit cheeky but I think it must be written into the contract with the customer.

antrobus

InsideInsurance wrote: »

...
My understanding is that by passing them through the non-VAT registered entity the VAT is effectively stuck

As far as I'm aware; yes.

InsideInsurance wrote: »

....Is there anyway to pass the costs of the VAT incurring items to the Client to enable them to recover VAT from them? ...

Off the top of me 'ead I can think of two routes;

(1) An agent/principal relationship is established between Middleman1 and Client so that, for example title to the goods that are sourced and supplied remains with client.

But that sort of thing can get complicated. See
http://www.hmrc.gov.uk/manuals/vtaxpermanual/vtaxper36820.htm

(2) Middleman1 forms a separate limited company with its own VAT registration to handle this particular business. Of course HMRC does have its disaggregation rules, so this kind of arrangement is capable of being attacked.

Of course, I wouldn't do anything without proper professional advice.

InsideInsurance

Actually its not about insurance but it would be similar if it was. Thankfully insurers can afford professional tax advice from the get go rather than needing public forums initially to be later vetted by accountants

But if they invoice the client for VAT separately this presumably remains unrecoverable by the client

pooch

InsideInsurance wrote: »

A little bit of a complicated setup but just want to get others opinions on VAT and effectively disbursements.

There are 3 or 4 parties involved in the process.... multiple product providers (all VAT registered), a client (VAT registered) and a middleman1 (not VAT registered). There is a second middleman2 that is VAT registered that is willing to be involved for a relatively small fee if it can help.

So the Client, contracts a number of services from the non-VAT registered Middleman1, one part of that is the sourcing and supply of goods to their customers.

The Client does want the services of Middleman1 and not to deal with all the product providers directly and Middleman1 obviously wants to maintain their cut too which they manage to do by keeping as many of the services inhouse.

Obv at the same time Client wants costs as low as possible. Cost of goods/ materials are passed on at cost and agreed service charge added.

Now the problem is that the Middleman1 isnt VAT registered and isnt willing to/cant be.

Is there anyway to pass the costs of the VAT incurring items to the Client to enable them to recover VAT from them? My understanding is that by passing them through the non-VAT registered entity the VAT is effectively stuck

A non VAT registered business can neither legitimately charge VAT nor reclaim VAT.

The only way round this if the non-registered business does not wish to register for VAT (I'm not sure why they could not) is to cut out the middleman.

A more realistic solution may be for the middleman to just be an agent, so allow the supplier & customer to trade directly and the middleman can invoice only for their agency services (without any VAT of course)
But you say the customer is not prepared to deal directly with the supplier for some reason, so that won't work.

InsideInsurance

pooch wrote: »

A non VAT registered business can neither legitimately charge VAT nor reclaim VAT.

The only way round this if the non-registered business does not wish to register for VAT (I'm not sure why they could not) is to cut out the middleman.

A more realistic solution may be for the middleman to just be an agent, so allow the supplier & customer to trade directly and the middleman can invoice only for their agency services (without any VAT of course)
But you say the customer is not prepared to deal directly with the supplier for some reason, so that won't work.

There are a very large number of suppliers and any one job can involve a number of them. Likewise there are many clients involved too. To get every client to contract with each supplier, even on a on demand basis, would be onerous and could make getting the middlemans bulk discount more complex. The middleman also enforces standards, deals with the coordination between the parties etc which is all easier to be done when you arent waiting for new contracts to be signed or trying to check whos paid and whos not etc.

The sticking point is just how to deal with the VAT when its a cost thats simply being passed straight through

paddyrg

InsideInsurance wrote: »

The sticking point is just how to deal with the VAT when its a cost thats simply being passed straight through

If the middle man doesn't want to register, and doesn't want to pass the business to a middleman who is registered, I don't see any other legal options than to suffer the VAT.

Aquamania

InsideInsurance wrote: »

There are a very large number of suppliers and any one job can involve a number of them. Likewise there are many clients involved too. To get every client to contract with each supplier, even on a on demand basis, would be onerous and could make getting the middlemans bulk discount more complex. The middleman also enforces standards, deals with the coordination between the parties etc which is all easier to be done when you arent waiting for new contracts to be signed or trying to check whos paid and whos not etc.

The sticking point is just how to deal with the VAT when its a cost thats simply being passed straight through

If there is a large number of suppliers and a large number of final customers, and all this is passing through one middleman, I'm surprised the middleman is not forced to register for VAT anyway for exceeding the VAT registration threshold.

Anyway, at present it's very simple.

The supplier sells the item to the middleman and as always charges VAT

The middleman pays the suppliers invoice. As the middleman is not registered for VAT he cannot recover any VAT paid.

The middleman sells the item onto the final customer. As he is not registered for VAT he does not add any VAT onto his invoice (an invoice which presumably includes the middleman's markup, charges for services rendered, etc.)

Simples! :cool:

InsideInsurance

Aquamania wrote: »

As he is not registered for VAT he does not add any VAT onto his invoice (an invoice which presumably includes the middleman's markup, charges for services rendered, etc.)

There is no markup/charges, its a straight pass through, the charges for the services are effectively an annual subscription paid up front which gives them access to "unlimited" use of the service


Spoke to a tax accountant the other day and their view was that the middleman can pay the net amount, the client can pay the supplier the VAT only and this would allow them to recover the VAT without needing to mess about with contracts/ accounts etc. The middleman can then bill for the net amount to the client.

Sounds a bit odd to me but have it in writing from them so