Explain VAT to me
Discussion
I've been a contractor for a while, but I've never figured out the VAT part. Well I understand my side of VAT but I don't understand how the company who pays my VAT works.
I'm registered for VAT, so I add 20% to all my invoices and pay this to HMRC every quarter.
For the sake of this argument :
lets call my company Creampuff Industries Limited (CIL)
and lets call the company who I contract to Creampuff's Lunch Money Limited (CLML).
I add 20% to my CIL invoice for VAT. Are CLML able to reclaim the VAT they pay CIL? From where do they reclaim the VAT?
If some of the work CIL (me) performs is directly chargeable to a CLML client and some of it is CLML overhead, is the same amount of VAT reclaimable by CLML?
I'm registered for VAT, so I add 20% to all my invoices and pay this to HMRC every quarter.
For the sake of this argument :
lets call my company Creampuff Industries Limited (CIL)
and lets call the company who I contract to Creampuff's Lunch Money Limited (CLML).
I add 20% to my CIL invoice for VAT. Are CLML able to reclaim the VAT they pay CIL? From where do they reclaim the VAT?
If some of the work CIL (me) performs is directly chargeable to a CLML client and some of it is CLML overhead, is the same amount of VAT reclaimable by CLML?
The taxman only wants VAT on the value added each time something is sold. Say for example you are a builder, and buy some bricks at £1 ex VAT each. There's 20p VAT on those, which you pay to the person you bought the bricks from.
However, your company lays those bricks, and for the sake of argument you charge £10 ex VAT per brick. There's £2 per brick which you charge the customer, but because you've already paid 20p per brick in VAT, you can balance it off on your VAT return so you only have to send £1.80 to the taxman.
If the company you are doing the bricklaying for then sells the wall to someone for £100 a brick ex VAT , they'll charge £20 VAT, but can balance off the £2 they already paid to you and pay the taxman £18.
If they sell the wall to an end customer (not a business), they'll pay £120 including VAT and can't claim it back.
I really hope VAT is chargeable on bricks.
However, your company lays those bricks, and for the sake of argument you charge £10 ex VAT per brick. There's £2 per brick which you charge the customer, but because you've already paid 20p per brick in VAT, you can balance it off on your VAT return so you only have to send £1.80 to the taxman.
If the company you are doing the bricklaying for then sells the wall to someone for £100 a brick ex VAT , they'll charge £20 VAT, but can balance off the £2 they already paid to you and pay the taxman £18.
If they sell the wall to an end customer (not a business), they'll pay £120 including VAT and can't claim it back.
I really hope VAT is chargeable on bricks.
davepoth said:
The taxman only wants VAT on the value added each time something is sold. Say for example you are a builder, and buy some bricks at £1 ex VAT each. There's 20p VAT on those, which you pay to the person you bought the bricks from.
However, your company lays those bricks, and for the sake of argument you charge £10 ex VAT per brick. There's £2 per brick which you charge the customer, but because you've already paid 20p per brick in VAT, you can balance it off on your VAT return so you only have to send £1.80 to the taxman.
If the company you are doing the bricklaying for then sells the wall to someone for £100 a brick ex VAT , they'll charge £20 VAT, but can balance off the £2 they already paid to you and pay the taxman £18.
If they sell the wall to an end customer (not a business), they'll pay £120 including VAT and can't claim it back.
I really hope VAT is chargeable on bricks.
Haha, that last sentence made me laugh. However, your company lays those bricks, and for the sake of argument you charge £10 ex VAT per brick. There's £2 per brick which you charge the customer, but because you've already paid 20p per brick in VAT, you can balance it off on your VAT return so you only have to send £1.80 to the taxman.
If the company you are doing the bricklaying for then sells the wall to someone for £100 a brick ex VAT , they'll charge £20 VAT, but can balance off the £2 they already paid to you and pay the taxman £18.
If they sell the wall to an end customer (not a business), they'll pay £120 including VAT and can't claim it back.
I really hope VAT is chargeable on bricks.
OK in this case lets say my company, CIL, lays the bricks and I invoice my client £10 + £2VAT per brick. The company I'm doing the bricklaying for is then CLML.
Lets say for the next part of the example, CLML does not sell the wall to anybody. Not to another private person and not to another business. The wall is just some kind of overhead. Does this mean that the wall just costs CLML £10+2 = £12 per brick instead of the £10 per brick it effectively costs of they sell the whole wall?
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The reason I ask this is that I am a long term contractor in the oil and gas industry (which generally pays quite well), but this industry is down the toilet at the moment leaving me out of a job, so I am going to have to get a job in a different and lower paying industry for a while. I have found a job in a different industry that I like, despite the lower pay. I'd like it to work out for as long as possible, or at least a year or so more than the first better paying oil/gas job turns up.
Unf they want to hire as permanent staff and the net after tax salary doesn't work for me in the long term. I'd have to dump the job as soon as a better paying oil/gas job turns up again. The only way it would work out is if I went contract for the same ex-VAT pay as the permanent staff salary they are proposing, which will have the benefit for me that I can run it through the company and pay a flat 20% company tax (forget about personal tax on dividends for the purpose of this question).
I want to be clear on if I go contract instead of permanent it will cost my employer an extra 20% (the VAT) or not. It seems it will not cost them 20%, provided they sell my services to one of their clients. The difficulty is that only part of my work will be billable and the rest will be internal overheads. I'm not clear on if the work I do on overheads and I still charge 20% VAT on my invoices will actually cost them 20% or not. Across all the work I do, I'd presumably earn them a profit or they wouldn't be offering me a job in the first place.
If they are VAT registered they can claim the VAT you charge them regardless if they resell your work or not is the simple answer.
Same way is if you purchase a 1000+vat laptop, you will pay PC World £1200 but at the end of yoir VAT quarter you will get that £200 offset against your VAT bill even tho you didn't resell the laptop.
Same way is if you purchase a 1000+vat laptop, you will pay PC World £1200 but at the end of yoir VAT quarter you will get that £200 offset against your VAT bill even tho you didn't resell the laptop.
VAT is collected, paid over and reclaimed as the goods and services pass through the various suppliers. When it gets to "the man in the street", who cannot reclaim the VAT, the final VAT collected by the retailer is paid over to HMRC and retained by the Treasury.
As has been explained, at each stage in the process, profit margin is added to the value of the goods or services as they make their way to the final consumer.
There can, of course, be breaks in the chain of paying and reclaiming VAT as the work moves towards the consumer. These breaks can occur because some of the traders involved my not be VAT registered or a process or service my by imported or exported along the way - or some of what had been VATable material my end up in a VAT Exempt product.
It is, in many ways, a very cumbersome system. However, from the Treasury's point of view it is pretty cost effective because the burden of administering and coping with the accounting and paperwork associated with VAT falls on the trader.
It was originally a French form of tax - which probably explains all.
As has been explained, at each stage in the process, profit margin is added to the value of the goods or services as they make their way to the final consumer.
There can, of course, be breaks in the chain of paying and reclaiming VAT as the work moves towards the consumer. These breaks can occur because some of the traders involved my not be VAT registered or a process or service my by imported or exported along the way - or some of what had been VATable material my end up in a VAT Exempt product.
It is, in many ways, a very cumbersome system. However, from the Treasury's point of view it is pretty cost effective because the burden of administering and coping with the accounting and paperwork associated with VAT falls on the trader.
It was originally a French form of tax - which probably explains all.
Yes I'm doing flat rate VAT.
For me original idea though, if my permanent salary was £X and I suggested they might like to hire me as a contractor on a rate where I also got the same £X excl VAT over the course of a year, I take it then it would not cost my employer/client anything extra over employing me on a salary?
They don't have a big local office or correspondingly big HR and already hire consultants as needed, so they might be agreeable to it.
For me original idea though, if my permanent salary was £X and I suggested they might like to hire me as a contractor on a rate where I also got the same £X excl VAT over the course of a year, I take it then it would not cost my employer/client anything extra over employing me on a salary?
They don't have a big local office or correspondingly big HR and already hire consultants as needed, so they might be agreeable to it.
creampuff said:
Yes I'm doing flat rate VAT.
For me original idea though, if my permanent salary was £X and I suggested they might like to hire me as a contractor on a rate where I also got the same £X excl VAT over the course of a year, I take it then it would not cost my employer/client anything extra over employing me on a salary?
They don't have a big local office or correspondingly big HR and already hire consultants as needed, so they might be agreeable to it.
HMRC insists that individuals cannot "chose" to be considered "self employed" (or being handled through their own limited company)rather than employed.For me original idea though, if my permanent salary was £X and I suggested they might like to hire me as a contractor on a rate where I also got the same £X excl VAT over the course of a year, I take it then it would not cost my employer/client anything extra over employing me on a salary?
They don't have a big local office or correspondingly big HR and already hire consultants as needed, so they might be agreeable to it.
That is what IR35 is all about
Your "status" is a matter of fact, not a matter of choice.
IR35: At the moment they hire several external consultants to help them out on an ad hoc basis. I'd be replacing some of the consultants, but they would still need to hire others on an ad hoc basis. It appears to me that the job is that of a consultant for which they want to make more regular use of and should be quite possible to draw up an IR35 compliant contract. The job seems to lack the features of a permanent employee job, for instance there is limited direction on how to perform the work, only that a particular outcome is required.
creampuff said:
IR35: At the moment they hire several external consultants to help them out on an ad hoc basis. I'd be replacing some of the consultants, but they would still need to hire others on an ad hoc basis. It appears to me that the job is that of a consultant for which they want to make more regular use of and should be quite possible to draw up an IR35 compliant contract. The job seems to lack the features of a permanent employee job, for instance there is limited direction on how to perform the work, only that a particular outcome is required.
As I said, the "facts" of the engagement determine what the status is.And the facts are determined, not by the terms and conditions of the contract, but by the actual way the engagement is conducted (see the Dragonfly Ltd case).
You can get an idea of whether you may be at risk of being inside IR35
https://www.crunch.co.uk/calculators/ir35-calculat...
Not a substitute for professional advice, but will give you an idea.
https://www.crunch.co.uk/calculators/ir35-calculat...
Not a substitute for professional advice, but will give you an idea.
Interestingly, you will note that the questionnaire does not ask if you have many customers/clients or just one.
Many people who talk to me about IR35 seem to think that having more customers is one of the factors which reduces your risk to IR35. As the questionnaire shows, it's not a major factor at all. The key aspects are control over the work you are doing. "Who's the boss" is the simplest question to can ask yourself.
Many people who talk to me about IR35 seem to think that having more customers is one of the factors which reduces your risk to IR35. As the questionnaire shows, it's not a major factor at all. The key aspects are control over the work you are doing. "Who's the boss" is the simplest question to can ask yourself.
Eric Mc said:
Interestingly, you will note that the questionnaire does not ask if you have many customers/clients or just one.
Many people who talk to me about IR35 seem to think that having more customers is one of the factors which reduces your risk to IR35. As the questionnaire shows, it's not a major factor at all. The key aspects are control over the work you are doing. "Who's the boss" is the simplest question to can ask yourself.
That questionnaire is focussed on using a company as an intermediary in providing the services, which is what the OP is looking at.Many people who talk to me about IR35 seem to think that having more customers is one of the factors which reduces your risk to IR35. As the questionnaire shows, it's not a major factor at all. The key aspects are control over the work you are doing. "Who's the boss" is the simplest question to can ask yourself.
If the services are delivered via a partnership (or as an individual) then it's my understands that one of the tests for IR35 is if the most or all income comes from providing services to a single client (and it's associates).
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