VAT for consultancy work?
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jscott08
Posts: 38 Forumite
in Cutting tax
I am a consultant on the side of my normal job. I am set up as a limited company and work with another individual who has a limited company. For this particular job, the total consultancy fee would get paid by invoice in to my partners bank account, which i assume he would then have to pay VAT on. I then invoice him for my share - would I then pay VAT again?
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so the job has been performed by his Ltd Co and you are working for his company as one of its subcontractors, otherwise what you say makes no contract/legal sense, since "you" cannot have a share of the income which is paid to his company, since it is not "you" doing the work for the customer.
is your company VAT registered? Presumably not, since I doubt "work on the side" takes your company over £85,000 turnover, and thus into compulsory registration. So no, your company cannot charge VAT to his company
equally it would be counter productive to voluntarily register your company for VAT, since it sounds like you are a personal service company with limited costs and so negligible VAT to be recovered anyway0 -
so the job has been performed by his Ltd Co and you are working for his company as one of its subcontractors, otherwise what you say makes no contract/legal sense, since "you" cannot have a share of the income which is paid to his company, since it is not "you" doing the work for the customer.
is your company VAT registered? Presumably not, since I doubt "work on the side" takes your company over £85,000 turnover, and thus into compulsory registration. So no, your company cannot charge VAT to his company
equally it would be counter productive to voluntarily register your company for VAT, since it sounds like you are a personal service company with limited costs and so negligible VAT to be recovered anyway
In bold is correct yes. I wouldn't be looking to charge him VAT here (at least in an additional sense), more of a question of what I will be legally obliged to pay the government. I myself have only been Ltd. for a few months, but I will likely have to register my company for VAT soon. For this job the gross fee to client was 30k, with the agreement with the partner to split this. Originally the fee was to be split on gross revenue, however he has now changed it to profit. Issues with the agreement we have aside, he will I assume be paying VAT on the 30k, would I then also pay VAT on what I get paid out of the remainder?0 -
In bold is correct yes. I wouldn't be looking to charge him VAT here (at least in an additional sense), there is no "sense" about it, your company is not VAT registered so cannot charge VATmore of a question of what I will be legally obliged to pay the government. I myself have only been Ltd. for a few months, but I will likely have to register my company for VAT soon. what do you mean by soon?
the VAT position has nothing to do with your contractual relationship with his company.For this job the gross fee to client was 30k, with the agreement with the partner to split this. Originally the fee was to be split on gross revenue, however he has now changed it to profit. Issues with the agreement we have aside, he will I assume be paying VAT on the 30k, would I then also pay VAT on what I get paid out of the remainder?
Looks like you don't understand what is meant by "gross"
You say his company charged its client 30k gross, so that means £25,000 net + 20% VAT (£5,000) = 30k gross
His company's client will pay his company 30k
His company will pay over the £5,000 VAT to HMRC
Your company plays no part in those transactions whatsoever.
How you split the 25k net income is a matter of what your contract with him says. There is no VAT on that at all since you are not VAT registered so won't be charging VAT to him nor paying VAT to HMRC.
If you think you are entitled to a share of 30k then either you or him misunderstood the position when you agreed your "profit" share, the net income is 25k, not 30k. read your contract with him and open a legal dispute with him if you think you have a case.
sounds like you need to do a VAT basics training course if you want to run your own company:
https://www.gov.uk/guidance/help-and-support-for-vat
going forward, when dealing with business to business transactions, you quote net figures, not gross figures. That way anyone who is VAT registered won't care because they will simply claim the VAT charged as their own input tax. Anyone who is not VAT registered won't be charging VAT anyway and if they are the one buying from a VAT registered company, then they should have seen that the price quoted would be + VAT because that is how it is done.0 -
the VAT position has nothing to do with your contractual relationship with his company.
Looks like you don't understand what is meant by "gross"
You say his company charged its client 30k gross, so that means £25,000 net + 20% VAT (£5,000) = 30k gross
His company's client will pay his company 30k
His company will pay over the £5,000 VAT to HMRC
Your company plays no part in those transactions whatsoever.
How you split the 25k net income is a matter of what your contract with him says. There is no VAT on that at all since you are not VAT registered so won't be charging VAT to him nor paying VAT to HMRC.
If you think you are entitled to a share of 30k then either you or him misunderstood the position when you agreed your "profit" share, the net income is 25k, not 30k. read your contract with him and open a legal dispute with him if you think you have a case.
sounds like you need to do a VAT basics training course if you want to run your own company:
https://www.gov.uk/guidance/help-and-support-for-vat
going forward, when dealing with business to business transactions, you quote net figures, not gross figures. That way anyone who is VAT registered won't care because they will simply claim the VAT charged as their own input tax. Anyone who is not VAT registered won't be charging VAT anyway and if they are the one buying from a VAT registered company, then they should have seen that the price quoted would be + VAT because that is how it is done.
Thanks for the info, I think I may have worded my response poorly. I will likely go over the 85k threshold in a few months, so it will be within the same tax year. Registering for VAT 'soon' will likely be in January or February. I would assume I then have to backdate the VAT on income such as this?
The scenario is as you said - out of the £30k, £25k is net and 5k VAT. Of that £25k I will then be invoicing for £12.5k. I'm not currently VAT registered but will likely be soon - If the first question is correct, would I then have to backdate the VAT payment on the £12.5 (of £2,100)?
Side note; I will be getting an accountant at some point as I am definitely out of my depth with the finance side of things, however I need to sort these invoices ASAP so need to know what to bill.0 -
Actually, having done more reading about, it seems you only pay VAT from the date of registration and wouldn't get backdated for services, only potentially when bought goods are involved?0
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You only charge VAT on your invoices from the date you register for VAT.
You need to check the VAT registration guidance, see below, but you work out the date based on when your income goes over the VAT threshold - You don't backdate it to the start of any year or accounting period.
If you think about it, when you issued your first invoice you didn't know that you would ever go over the VAT threshold so you didn't charge VAT on it, you cant go back and now ask your customer for the VAT.
You must register for VAT if your VAT taxable turnover goes over £85,000 (the ‘threshold’), or you know that it will. Your VAT taxable turnover is the total of everything sold that is not VAT exempt.
You can also register voluntarily.
Compulsory registration
You must register for VAT if:- you expect your VAT taxable turnover to be more than £85,000 in the next 30-day period
- your business had a VAT taxable turnover of more than £85,000 over the last 12 months
If you’ll exceed the VAT threshold in the next 30-day period
You must register if you realise that your total VAT taxable turnover is going to be more than £85,000 in the next 30-day period.
You have to register by the end of that 30-day period. Your effective date of registration is the date you realised, not the date your turnover went over the threshold.
ExampleOn 1 May, you realise that your VAT taxable turnover in the next 30-day period will take you over the threshold. You must register by 30 May. Your effective date of registration is 1 May.
If you exceeded the VAT threshold in the past 12 months
You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.
You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.
Example Between 10 July 2017 and 9 July 2018 your VAT taxable turnover was £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August 2018. Your effective date of registration is 1 September 2018.0 -
Sorry, you posted while I was writing. Not quite sure what you mean by the new post.
Any backdating is only for input tax (VAT on purchases) that can possibly be reclaimed. This woukd be unlikely as a consultancy - usually stock on hand or assets.0 -
You only charge VAT on your invoices from the date you register for VAT.
You need to check the VAT registration guidance, see below, but you work out the date based on when your income goes over the VAT threshold - You don't backdate it to the start of any year or accounting period.
If you think about it, when you issued your first invoice you didn't know that you would ever go over the VAT threshold so you didn't charge VAT on it, you cant go back and now ask your customer for the VAT.
This is exactly the bit I was confused about - whether it needs to be backdated if you go over in the accounting period - thanks for clarifying!0 -
pay attention to the rules for the period whilst you are waiting for HMRC to give you a VAT number - that is when you will and must "backdate" to the effective date of registration but cannot show VAT on your sales invoice because you are not yet legally allowed to do soActually, having done more reading about, it seems you only pay VAT from the date of registration correct and wouldn't get backdated as you are still "loose" with your understanding that is not as clear as you think - see my further comments below [STRIKE]for services, only potentially when bought goods are involved?[/STRIKE] incorrect
you either need to get a lot more reading done or get a bookkeeper/accountant in place before then, as you will nonetheless legally owe VAT to HMRC, and will have to pay it whether you have charged your customers the correct invoice value or not from the registration date ("effective date")
this is a superficial intro to VAT - pay particular attention to section 4 "adjusting your pricing" as that bit is reasonably well written
https://www.startupdonut.co.uk/tax-and-national-insurance/accounting-and-bookkeeping/vat
given you will be working as a consultant, I strongly urge you to find an accountancy practice used to dealing with consultants as a) they should be cheaper than a "general" practice and b) they will know what needs doing with, for example, which flat rate VAT rate you must use or whether you would be better on the standard scheme0 -
You'll be better in standard VAT, that's an easy one. In the flat rate you'd be on 16.5% as you are not trading in goods and no-one comes out better off on 16.5%.
You need to be very careful with VAT. Over half of all tax enquiries are VAT enquiries, and HMRC are utterly merciless on it. So if you make what you consider to be a minor error but it is to HMRC one which has resulted in you paying £10k too little in VAT, they will say "Here's a bill for the £10k, plus a £5k penalty."
The sort of loose wording you've used in these posts is an open goal for HMRC to side foot the ball into the net, should you make any mistakes with it. Hire someone decent.Hideous Muddles from Right Charlies0
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