I think a major factor in your confusion is you are unclear of who wears whose hat in this activity and therefore what the relationship is one to the other. Understand that relationship and the VAT will answer itself
There are 5 players:
1.
The Client - the LA is the client. It has a project it wants done and it will pay for that work, the payment comprising 2 elements: a fee and reimbursement of expenses incurred over and above the fee.
2.
The Supplier - the CIC is the supplier. The LA tasks the CIC with the project work and leaves the CIC to resource the work as the CIC sees fit. The costs of resourcing the work are costs incurred by the CIC. It will fund those costs from 2 elements: a) the fee paid by the LA and b) reimbursement of expenses incurred by the CIC over and above the fee and *
recharged* to the LA.
3.
The CIC worker. You as a human being are an employee of the CIC. The CIC may decide to do all (or some) of the project using its own staff, ie you the human being. You are its worker and any work you do whilst wearing your employee hat is a cost for the CIC and comprises 2 elements: a) whatever "pay" you get as an employee and b) any expenses you incur which you claim from your employer, the CIC
4.
The Ltd Co- rather than use its own employee workers, the CIC can of course choose to outsource the project work to an external "consultant". That would be (your) Ltd Co. and the Ltd co will therefore have a price it will charge the CIC. That price comprises 2 elements: a) the fee to be paid by the CIC and b) reimbursement of expenses incurred by the Ltd Co and *
recharged* to the CIC over and above the fee .
5.
The Ltd Co employee/"consultant" - "you" the human being are an employee of the Ltd Co and it is "you" who the Ltd co needs to do the work it has been contracted to provide to its client, the CIC. As an employee of the Ltd Co, you a) expect to be paid by (your) company for your time and b) not be out of pocket if you incur expenses in performing that work, ie you will claim expenses from (your) Ltd Co.
Lets look at the 2 obvious permutations
Scenario A) the work is done by the CIC employee.
Expenses are claimed by the employee from the CIC. Those are costs incurred by the CIC, so the CIC can claim VAT included (where applic) in those costs as its own "input" VAT. Now the bit people nearly always struggle with: the CIC *recharges* the expense cost it has incurred to its client. The recharge MUST have VAT added to it as that is the rule people don't appreciate. The client therefore gets a bill for a gross cost which it pays to the CIC. You won't understand this unless we look at numbers, let's say the expense is a £50 hotel room:
- the employee pays the hotel £50. That cost is gross, so is made up of £41.66 net and £8.33 of VAT
- the employee claims £50 from his employer, the CIC
- the CIC reclaims £8.33 of ("input") VAT and records £41.66 as a net expense cost incurred by its employee doing work for his employer
- the CIC *recharges* its client for the net cost it incurred (£41.66) and must add ("output") VAT to that bill, ie it charges the LA £50. The £8.33 VAT it has added must be paid to HMRC by the CIC as output VAT
- the LA gets a bill for £50. The LA pays that bill in full, but claims £8.33 as input VAT, so the net cost to the LA is £41.66. The LA sends the £50 to the CIC and thereby the CIC has the £50 of cash it needs with which to i) fund the £8.33 VAT payment to HMRC and ii) fund the £50 cash reimbursed to its employee comprised of the remaining 41.66 of cash from the LA + the 8.33 of input VAT it claims back from HMRC.
Now look at scenario B, the work is done by the Ltd Co.
The mechanics are the same: you the human being (wearing your employee/"consultant" of ltd Co hat) do the work, claim the expense from the ltd Co, who recharges its client the CIC, who recharges its client the LA. The funds flow from the LA back to the Ltd Co which therefore ends up with zero cost having reimbursed its human being employee £50 and been paid £50 by its client, the CIC. The CIC has simply acted as a conduit for the £50 going through and also has no gain and no loss.
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For example - local authority pays the full amount of the receipted expense [whether VAT or not]
Originally posted by JulesBee
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please note if that statement means the invoice sent to the LA has not charged VAT on the value of the expense being claimed then the claimant entity is making a very bad VAT error and could be pulled up sharply by HMRC if VAT inspected
read this, noting that *Disbursements* and *Recharges* are two totally different fish. "Your" expenses are *Recharges*
https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers