Invoicing Flat Rate Customer

mrb82

Good morning members!

I have a customer who is saying they are on the flat rate scheme for VAT. I have asked for a copy of the registration form from HMRC for our records, but I'm not sure how I'd go about invoicing them?

Do I treat them as not VAT registered because they are unable to claim the VAT back, or do I charge a set percentage?

I'm not sure if this makes a difference, but I work for a credit hire organisation so the VAT is on our hire vehicle charges. We bill the insurance company the net, then the client (if registered for VAT) the VAT (taking in to account the 50% block rule if necessary).

Thanks!

coojee

It makes no difference to how you invoice them, you just invoice them in exactly the same way with VAT as you would normally.

mrb82

Thanks for the reply.

What is confusing me is that the customer will not be able to reclaim the VAT on the invoice, so they will be at a loss? Is this something the customer will just have to take a hit on?

AK002

You invoice as normal, with 20% VAT.

They reclaim at their percentage, which is lower than 20% but is set that way that it takes account of their COS that they would have claimed had they not been on the FRS.

The FRS was more a scheme set up for people to simplify VAT accounting and not (as it generally is) a way to pay less VAT.

NeilH

Hi

They won’t be able to claim back the VAT but as they are on a flat rate scheme they won’t pay over the full amount of VAT they collect on their sales.

As an example: a business on a flat rate scheme of 15% (this varies) would charge 20% on their sales but only have to pay over 15% of the gross value. A sale of £250 would be a gross of £300 (£50 VAT), the customer they sell to would claim back the full VAT (£50) but the business on the flat rate scheme would only have to pay over £45 to HMRC. The business therefore saves £5 on there sale but wouldn’t be able to claim back any VAT on there purchases.

Whether or not flat rate works best for a business depends on the businesses nature. A friend of mine is management trainer whose turnover is above the VAT threshold. his expenses are quite minimal (a bit of stationery, apportioned home utilities, mileage) in comparison to his turnover and he saves money being on the flat rate scheme as opposed to the standard scheme. It's worth noting there is an upper turnover limit for the FRS.

Neil

mrb82

Thanks for the replies all

I'm finding VAT more and more interesting the more I look in to it! Indirect tax at level 3 in a couple of weeks. Looking forward to it!

deanshepherd

I think you need to take advice on this matter.

From your original post it sounds like the costs are being covered by insurance which means the customer should not be out of pocket. If you treat them as a normal VAT registered business they will be out of pocket because they cannot recover the VAT on your costs.

If I have understood your situation correctly, I suspect you will need to treat them as not VAT registered and recover the lot from the insurance company.

NeilH

Hmm, yes. My explanation is fine in the usual circumstances, but not insurance cases.

If the client was liable to pay for these costs themselves, they would just have to take the "hit", but in this case they may need to see what their insurerance policy stipulates.

Neil

mrb82

And to add to matters, it's not their own insurance company paying the net invoice (plus 50% VAT), it's the other side's insurer.

I think I will go to the other side and tell them the client isn't VAT registered and have their registration document ready for queries. If they argue it we will go from there.

Thanks again!

reader

mrb82 wrote: »

the VAT is on our hire vehicle charges. We bill the insurance company the net, then the client (if registered for VAT) the VAT (taking in to account the 50% block rule if necessary).

Thanks!

Just out of interest, if the client was not VAT registered would you bill the VAT to the insurers?

Another question, why isn't there a standardised/consistent approach, i.e. always billing client the VAT (regardless of whether or not the client is VAT registration) or never billing client the VAT (regardless of whether or not the client is VAT registered)?

The only reason I ask is because I'm curious.

Anyway, good luck with your indirect tax exam (I'm sure your exam looks like a piece of cake now you are dealing with this).

NeilH

reader wrote: »

Another question, why isn't there a standardised/consistent approach, i.e. always billing client the VAT (regardless of whether or not the client is VAT registration) or never billing client the VAT (regardless of whether or not the client is VAT registered)?

What the OP described is the standard procedure for business claimants who are VAT registered: the insurer picks up just the net (since they can't be VAT registered) and then the VAT is passed to the client who can then reclaim it. The problem here is that won't necessarily be beneficial for business registered on a flat rate scheme.

Neil

reader

NeilH wrote: »

What the OP described is the standard procedure for business claimants who are VAT registered: the insurer picks up just the net (since they can't be VAT registered) and then the VAT is passed to the client who can then reclaim it. The problem here is that won't necessarily be beneficial for business registered on a flat rate scheme.

Neil

Interesting........it's amazing how much I learn from these forums.

I was just looking at things from a tax statue/legislation point of view, i.e. is the way the credit hire company is going about accounting for output VAT (i.e. sometimes billing the client and then other times billing the insurer) compliant with VAT law e.g. VATA 1994, etc.

NeilH

Hi

I can't speak for VAT legislation, but in the companies I've worked, this is usually the case in insurance claims: the company paid for the VAT element and then reclaimed it, the insurance company paid the net. However, the companies I've worked for have always been registered on the standard VAT scheme.

Neil

mrb82

NeilH is correct.

The insurer seek to repay the claimant (the hire is in our client's name, but we are the ones recovering the losses in their name) by means of compensation, so the client has experienced a "loss" regarding the hire vehicle. The insurer will repay that cost so that they are putting the client back in the financial position they were in prior to the accident. Where our client is not registered for VAT, the insurer must repay the hire including VAT, as the client can not recover it and so is experiencing a greater loss if you will.

Where the client is registered for VAT, then they are not technically experiencing this element as a loss as they are able to recover it from HMRC. When it comes to hire vehicles, HMRC apply a 50% block rule if there is personal use on the vehicle, so the client can only recover 50% of the total VAT, the insurer is to repay the other 50% that can not be recovered as this is a loss to the client. If the vehicle is solely used for business, then the client is able to recover 100% of the total VAT.

It took a while for me to be able to get my head around this and explain it

By the way, I've not even started indirect tax yet!