Contra invoice & VAT

sjkr

Hi,

My client, who is not VAT registered, has accepted a job from one of his clients at a fixed rate. He has then sub-contracted the work out to another provider, who is VAT registered. He also supplies services to the sub-contractor. If the sub-contractor invoices my client for the work, he will have to charge VAT, which my client will have to pay but cannot claim back, or charge to his client.

Can my client deduct the amount he needs to pay to the other supplier from one of his invoices? No VAT would be shown as he is not VAT registered, but the sub-contractor would then have a record of the work being carried out.

Is this allowable or completely against VAT rules?

payrollpro

Your client clearly has to absorb the gross cost of supply and this is offset against the income from the contract. Normally you would charge net cost because the VAT is reclaimed but in this case you can't.

I am assuming the total invoice charge is cost of sales but either way the fact that VAT is included in the sub contractors invoice is irrelevant to your client. Also, don't get caught up in the attempts some contractors make to mitigate the VAT. I have seen some purchasers claim that VAT is only chargeable on taxable items and not on, say train fares which the sub contractor should put on an expenses claim.

This is not true and however your client reimburses the sub contractor any expenses incurred and included in the supply are taxable in full.

sjkr

Thanks, his problem is that he has agreed a price of £175 per day for the job with his client, however he has also agreed to pay his sub-contractor £175 per day and only make a profit on his own day's work, not on the sub-contractor's. However, he did not realise that the sub-contractor was vat registered, and so he will have to pay him £175 plus VAT, therefore he is actually going to end up making a loss of the VAT amount on the sub-contractors day's work. Is there any way of getting round this? He canot charge it on to his client as he is not VAT registered and has already agreed the price with his client.

slackda

Could argue that the £175 per day to the subby was including VAT.

payrollpro

That's what I was thinking. I have been doing contracting work for 10 years so I am very hot on making sure my client knows my charges are ex VAT but not all of them are so diligent.

The alternative is to register voluntarily, very quickly, and get the subby to hold back invoices till the registration is complete. Its not totally ethical I know, but its a way round it.

Payrollpro