VAT for small businesses

[wardy_mk]

Hello. Not sure if this is in the right forum so please bump it if not - it's about VAT and it's the only one that has VAT in the title!

Anyway, here's the question.

I run a small business - as a freelance 3D designer. I've been going a year and 4 months now. I'm VAT registered on the flat rate scheme at the moment. My turnover (inclusive of VAT) was just over £100,000 in my first calendar year.

I have someone who has begun to work kind of like an agent to me in that he sets me up with with work and I pay him a commission on the overall value of the job.
This is all fine. However, I have received my first invoice from him which has VAT added onto the price of what he'd quoted.
For illustration purposes he said "this will be £1000" so I quoted that on top of my value to the client.
However, his invoice obviously totalled £1200 to incorporate the 20% VAT.

This sounds stupidly simple but what are my options here? Should I have quoted his price to the client with the additional 20% on top of it? I don't really want to do this as it'd make my prices uncompetitive - after all, it'd be my hours, his commission, then his VAT, then my VAT.

I've asked my accountant but all he does is give me a ton of options and scenarios which quite frankly I find mind-boggling and boring beyond comprehension. I can't get a straight answer from him - just jargon.

All I want is for someone to say "don't add it to the price, just do this and that and you won't be liable for the VAT". Something along those lines...

If someone could help me on this I'd appreciate it as I'm scared!!

[Lambs]

Wow. Just... wow

[wardy_mk]

Wow. Just... wow

You've taken the time out of your day to type that?
Well done
*slow clap*

[Lambs]

Sorry, you're right. I should have said more.

Succinctly, you might not like the shortest distance between two points.

I suggest you read the advice your accountant gave you. You will probably have paid for it. It may well be very good advice.

At the risk of boggling your mind - or worse, boring you:

There is basically no relationship between what you pay in commission (or for anything else, for that matter) and what you decide to invoice on for your services. Charge whatever you like. Except that if you invoice too little, you'll lose money, and if you invoice too much, then you'll be uncompetitive.

There is no 'device' by which you can avoid charging VAT on your invoice or part of it. That is the whole point of VAT: if you charge more for your services, then you have to charge more VAT. (There's a thing called "disbursements" but someone charging YOU commission does not smell like a disbursement to me. If the commission were chargeable by reference to your client, it *might* be a different matter.)

When you raise a sales invoice, there is no particular need separately to identify any of your own costs in that invoice. You can do it to say, "look, I've incurred these additional costs", but it doesn't make a difference from a VAT perspective. If you get an invoice from your accountant, does it include his office rental costs, his BT bill, or the VAT on his car?

If you're a 3D designer then you are presumably charging VAT to business customers. In which case they may not care less how much extra VAT you charge, because they can reclaim all of it. The exceptions would be:

Private homeowners
Businesses that are exempt, such as BTL landlords
Other businesses also operating on the Flat Rate Scheme

But architects, property developers and the like will generally be able to claim all of their VAT costs (i.e., on your invoices). Of course the VAT element reflects your underlying professional fee. So, VAT aside, we are back to the competitive/uncompetitive issue.

I think you dislike the extra VAT cost to you. It's an extra cost you cannot reclaim because you are on the Flat Rate Scheme. The percentage you are on for your sector is supposed to cater for VAT on the costs your kind of business will typically incur. If it is costing you too much, then you can always leave and operate VAT in the normal way.

Regards,

Lambs

[wardy_mk]

Thanks. That's actually a lot clearer.

[Feedback]

you could always challenge your agent for the VAT charged if it was not part of the original contract between you. however you need to think long and hard about this approach as it may mean you lose a good agent.

i am also at a loss on how you can lose on this, given your marginal inputs/costs (other than your time) are going to be minimal.

for the sake of £200 on £100k per annum income, suck up the cost. you have probably paid more to your accountant for their advice.

[wardy_mk]

The only thing I'm concerned about is that the value of the business going to him is going to increase. He's on a 30% mark-up on my hours if that makes sense. Then 20% of that on top adds up to quite a bit. I'm trying to iron this out before it gets bigger. The client has promised a massive expansion of work and I just want to be clear on this VAT thing from the outset.

[spidersong]

The thing to be clear on is whether the flat rate is working for you.

Given the industry you're in I'd imagine most of your costs are services, so you may well fall under the Limited Cost Trader category just introduced, in which case you're going to need to be paying over 16.5% of your VAT inclusive turnover to HMRC. If you have lots of Input Tax (VAT) on services that you buy in then you'll be losing out by staying on the Flat Rate Scheme.

So say you invoice for £1000, plus £200 VAT, and to earn that you've paid £100 plus £20 VAT out to your 'agent':

Flat Rate Accounting since April 2017:

Total Invoiced: £1200 less £120 paid out = £1080 Amount to pay to HMRC £198 (16.5% 0f £1200) - Net income £882

Normal VAT Accounting:

Total Invoiced: £1200 less £120 paid out = £1080 - Amount to pay to HMRC £200, amount to claim from HMRC £20, you pay HMRC £180 - Net income £900


If your costs don't include much VAT then the Flat Rate scheme can (or did) work quite well for people, but the more VAT you incur on your purchases the less useful it is.

[AJ16]

I'm in a similar quandary to you but if you are paying such a very %age to the agent and the work is out there, then maybe you should aim to get more commissions direct so making your business ultimately more profitable?

[wardy_mk]

Well, I've since spoken to him about how it works. I just have to change to 'normal' vat instead of flat rate and keep better records of ins and outs of the business.