Payments to freelancers as disbursements?

[Stringy]

Hi everyone, I am hoping for some advice on potentially treating payments to freelancers as disbursements. I am also looking for a new accountant to help me to implement this correctly and lawfully, please let me know if you think you can help!

I am a sole trader, VAT registered on the flat rate scheme.

I provide musicians (string quartets etc.) to play at weddings and dinner functions etc.

My role is to handle all the admin, provide the equipment (music, music stands etc), handle the publicity and other day to day running of things, along with performing as a musician on the actual gigs.

Obviously more musicians are needed to make up a string quartet or similar, so I hire in freelance musicians as and when needed for each booking. I do not employ any of these musicians, they are all freelance sole traders, none of them are VAT registered.

Currently I invoice my clients for the whole amount, eg. for a string quartet £700 + £140 VAT = £840 all in. The other musicians then invoice me for their share of the fee, eg. £150 each. I then pay my flat rate VAT to HMRC, currently 12.5% but soon rising to 16.5% (due to the new limited cost trader clause) of the total turnover of £840.

My question is - Can I treat hiring the other musicians as disbursements, therefore reducing the amount of VAT chargeable to my clients? If I make it clear to my clients the services that I provide (as both a manager and a performing musician), and that I act as an agent to hire other freelance musicians on their behalf to perform as part of the ensemble, would this be permissible in the eyes of HMRC?

I've been thinking about this for a while now, as it could potentially reduce the total cost to my clients slightly whilst also increasing my bottom line profit slightly and reducing my VAT liability, as disbursements would not be included in my vatable turnover. The new 16.5% flat rate is also a kick in the nether region for me, so has prompted me to look into this further! The majority of my clients are not VAT registered so it is difficult to pass on any VAT liability. Also, the majority of my competitors are not VAT registered, so this could also help me to become more competitive.

It is my understanding that I would need to provide my clients with an itemised invoice, detailing the exact fee for each musician along the lines of the following:

My fee (inc. management and performing) - £300
VAT on my fee - £60
Disbursements:
Freelance musician 1 - £150
Freelance musician 2 - £150
Freelance musician 3 - £150
Total payable - £810

I also believe that after a year or so, my vatable turnover would drop below the de-registration threshold, which would please me greatly!

Sorry for waffling on, but I wanted to give as much info as possible in the hope of receiving some well informed advice.

Many thanks in advance!

[AJ16]

I will watch with interest as I use a couple of freelance designers. I'm wondering why you think it would be good to be able to de-register though as surely your bottom line could be higher if you grow and get your turnover up towards £150K?

[GlobalTaxAdviser]

Unfortunately you will not be able to treat this as a disbursements

Kind Regards

GTA

[Stringy]

Unfortunately you will not be able to treat this as a disbursements

Kind Regards

GTA

Any chance of explaining why please?

[Stringy]

I will watch with interest as I use a couple of freelance designers. I'm wondering why you think it would be good to be able to de-register though as surely your bottom line could be higher if you grow and get your turnover up towards £150K?

My turnover is towards £150k, but most of that is the fees for the freelancers. If I could de-register, my prices would be more competitive with no loss of profit.

[AJ16]

sometimes I ask clients to pay the freelancers direct so keeping outgoings down.

[AJ16]

perhaps you you be better off not in an FR scheme then you could claim back your costs??

[GlobalTaxAdviser]

Yes what AJ16 is a good idea but I suppose its better to provide a package to clients as it may inconvenient clients as will just mean more hassle and clients do not mind paying extra to forgo the hassle factor

Just like CIS clients I come across who get materials for their clients but if there client paid for it directly then they would be under the VAT threshold. Again some people don't want the hassle.

I understand where you are coming from as the VAT charged to your non VAT registered clients will mean an extra cost to them.

Though on the other hand like AJ16 suggested to change to the standard scheme where you can claim VAT from the equipment you purchase which I imagine would be significant.

You just need to weigh it up but looks like you have to remain VAT registered.

Actually, one other point is that you may want to change to a Limited company just for protection and maybe tax reasons

Also, that may delay the inconvenience of Making Tax Digital for another year.

Kind Regards

GTA

[Stringy]

Thanks for the replies, but I still don't understand why I can't treat the freelancer's fees as disbursements. GTA, it's not that I don't believe you, but I feel that I need to understand the reasons before I move on to look at other options....

I have read the HMRC guidance here - https://www.gov.uk/guidance/vat-costs-o ... -customers - and from my interpretation it would be entirely justifiable to treat them as disbursements.

To treat a payment as a disbursement all of the following must apply:

• you paid the supplier on your customer’s behalf and acted as the agent of your customer - Yes, this would be made clear on my contract.
  your customer received, used or had the benefit of the goods or services you paid for on their behalf - Yes, the freelancers would be performing music to the client at their wedding or event, for the clients benefit.
  it was your customer’s responsibility to pay for the goods or services, not yours - Yes, this would be made clear on my contract.
  you had permission from your customer to make the payment - Yes, this would be made clear on my contract.
  your customer knew that the goods or services were from another supplier, not from you - Yes, this would be made clear on my contract that the other musicians are freelancers and therefore are their own suppliers. They are not employed by me, they are freelancers with several sources of income (teaching & other ensembles/orchestras etc) and are able to pick and choose which work they accept entirely at their own discretion.
  you show the costs separately on your invoice - Yes, easy enough to do!
  you pass on the exact amount of each cost to your customer when you invoice them - Yes, easy enough to do!
  the goods and services you paid for are in addition to the cost of your own services - Yes, the client would pay me to manage the performance, source the necessary freelance musicians and perform music, the freelancers would be paid for their part of the performance.

It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT. - My point exactly! The freelancers are not VAT registered and the vast majority of my clients are not VAT registered.

So, what am I missing here?!

[GlobalTaxAdviser]

Hi

I understand where you are coming from and your points are perfectly valid but Disbursements are normally considered to be incidental expenses these do not seem incidental as you seem to be providing a fully fledged service irrespective of the contract. The disbursements just allow you not to charge VAT on these expenses.

Secondly the implicit contract seem to be between you and the freelancers.

It maybe better then to get the client to pay the freelancers direct if you are not providing a complete service to your client

Kind Regards

GTA