Sole Trader: Billing advice/VAT query

SussexAccountancy

Hi

Can someone help me with something which I think should be pretty simple.

I have a sole trader (John Smith) who is registered for VAT. He is a “print broker” – his clients come to him with print jobs, which he farms out to printing companies. The print company bill him £1000 (plus VAT) he charges the client £2000 (plus VAT) (say.) All good.

He has an (ex-)colleague who is being made redundant, who has a lot of high-end clients which he could take with him if he became a sole trader. My client, John Smith, has offered to help him get on his feet (and not taking any profits of the jobs at present) as the colleague gets used to being a sole trader (with the potential of becoming a partnership/limited company etc together at a later date).

My client is Mr John Smith trading as Smith Printing (say). John Smith has offered that his colleague can use Smith Printing when talking to clients which he will potentially take with him when made redundant, so that these clients will get billed using “Smith Printing” and all transactions (purchase and sales) will go through Smith Printing.

Meanwhile, the profit will then be handed over to the ex-colleague, with the ex-colleague billing Smith Printing.

So:

£2000 (plus £400 VAT) billed to End-Client from Smith Printing
£1000 (plus £200 VAT) billed from print supplier to Smith Printing
£1000 (no VAT) billed from colleague to Smith Printing – ie; the profit on the job, as it is the colleague’s client.

There is one problem with all of the above: the colleague is bringing in clients with much larger jobs than John Smith has previously dealt with, and these jobs need to be paid upfront, before the Client is billed. Hence the colleague is paying the monies to the print supplier, as John Smith doesn’t have that amount of cashflow – ie: the jobs will be £10,000 print jobs, rather than £1000.

My client has asked me how they should be dealing with the above. They have already done one job, where the supplier has billed Smith Printing, but the ex-colleague has paid the monies direct to the print supplier, so I also need to advise on how to deal with that particular situation, and then also advise on how to move forward.

Can anyone advise/confirm:

Am I on the right tracks as above?

The VAT implications – obviously the colleague is not VAT registered at present – am I right in thinking that John Smith will lose out. If the colleague is not able to charge VAT, then that will be less for John Smith to claim back (as per the example above). Should I be advising that John Smith should be asking for 20% of profits, to make up for the “loss” of recoverable VAT?

Is there anything illegal in the above, which should not be occurring - this situation will only occur for the next six months (tops) while they decide whether to go into partnership etc.

Do I need to think of anything else? Obviously it is up to the colleague to make sure he is correctly registered as a sole trader. I am primarily interested in making sure John Smith’s interests are covered, and he is given the correct advice!


Thanks very much!

JodieR

Hello, just a few comments on this:

Firstly, no, John Smith doesn't need to ask for 20% of 'profits' as he's not going to be out of pocket with the vat.

I don't think that there's anything illegal about this arrangement, but a potential complication with the new guy making payments directly to the supplier could be that in the case of an investigation HMRC may want to see the bank statements which show those monies being paid out. It could get messy. It may be better to ask the new man to loan his business a lump sum which would cover the cost of the print jobs and help with his cash flow, and then after the 6 months or whatever he'll repay the loan.

Jodie