Intermediary/commission VAT based question

[Josh-TB]

Hi,

Apologies if this is an overly simplistic question, I've been trying my best to read up on VAT all day and I've struggled to get a direct answer.

I'm in the process of creating a website whereby users submit requests detailing their requirements for a variety of construction-based jobs.
We have a small database of hand-picked tradesmen (sole-traders) who depending upon area and expertise, we arrange for them to visit the customers to provide quotes and ultimately carry out the work.
We would invoice the customer on behalf of the trade which once paid, we would take our percentage/fee and forward the remaining money onto the tradesman.

Now, I'm not sure if I'm being simple here but I'd like to ascertain what we would be liable to pay VAT on.

Example

Over the course of the month total revenue is £10,000
Our fee is 10% - £1,000
The remaining £9,000 is passed onto the trades.

Would VAT be payable on the overall revenue, i.e. £10,000 or only our 'commission' of £1,000?

Thanks in advance for your help.

[jpcentral]

I can see potential problems with what you are proposing and the simple answer to your question is "it depends".

The outline you have given makes It sound as if the end user's contract is with you. If that is the case, the whole amount which you invoice will probably be VATable. Of course, if the contractor is VAT registered you will receive a VAT invoice with reclaimable VAT.

The counter argument is that the end user receives the service from the trader and therefore the contract is with the contractor and the contractor's invoice can be treated as a disbursement. To achieve the latter, your invoice will have to differentiate between the amount invoiced by the contractor and your charge. In other words, your invoice will need to show two items:

For example:

Disbursement paid to XYZ Contractor - £9,000

Charge for arranging the service - £1,000 (£833.33 + VAT)

You should probably include a disclaimer saying that responsibility for problems/faults lies with the contractor.

Using this method, you won't be able to reclaim any VAT charged to you by a VAT registered contractor.


If you adopt the first method above, you could also fall foul of CIS (Construction Industry Scheme) requirements, assuming the work involved is likely to be construction or related trades. You could become a contractor under the rules and be required to deduct the relevant tax and send it to HMRC along with the required monthly submissions.

If you want to make it relatively simple, you should get the contractor to invoice the end user and you issue an invoice for your commission at whatever rate you agree.

[Josh-TB]

John,

Thank you very much for taking the time to post.

The outline you have given makes It sound as if the end user's contract is with you. If that is the case, the whole amount which you invoice will probably be VATable. Of course, if the contractor is VAT registered you will receive a VAT invoice with reclaimable VAT.
The aim is that within our terms it is explicitly clear we are essentially only offering a booking service. The work and responsibility is to remain with the tradesman who will also deal with the after-care (if required) - just like a normal job. When we issue the quote to the customer they will be aware of which company/individual will be carrying out the work.


The counter argument is that the end user receives the service from the trader and therefore the contract is with the contractor and the contractor's invoice can be treated as a disbursement. To achieve the latter, your invoice will have to differentiate between the amount invoiced by the contractor and your charge. In other words, your invoice will need to show two items:

For example:

Disbursement paid to XYZ Contractor - £9,000

Charge for arranging the service - £1,000 (£833.33 + VAT)
This would seem the most likely route. My only concern would be whether the customer would construed the second item as a charge which is directed at them. Whereas the aim is for the charge to be swallowed by the trade, with the service being advertised as costing the customer nothing (although no doubt most trades will take account of our fee as part of their quote). Is there a different way possibly of presenting this on an invoice?


You should probably include a disclaimer saying that responsibility for problems/faults lies with the contractor.
This is certainly something we're also under way with, there are a few companies who offer a slightly different service who have T+C's to protect themselves again this. <Hopefully> we can adopt a similar stance, but that's a headache for tomorrow!


Using this method, you won't be able to reclaim any VAT charged to you by a VAT registered contractor.
Excuse my ignorance, but in what situation would the contractor look to charge us VAT? My aim is for the funds to sent from the customer to us, then the money minus our fee, is sent to the trade. Would the trade be required to issue us with a separate invoice for their portion of the money?


If you adopt the first method above, you could also fall foul of CIS (Construction Industry Scheme) requirements, assuming the work involved is likely to be construction or related trades. You could become a contractor under the rules and be required to deduct the relevant tax and send it to HMRC along with the required monthly submissions.
Point taken, this is certainly something we'd like to avoid.


If you want to make it relatively simple, you should get the contractor to invoice the end user and you issue an invoice for your commission at whatever rate you agree.
Whilst I certainly agree this would be the simplest solution, it's an approach that we would like to avoid if possible. Firstly a large number of the trades we're dealing with are quite happy for us to the chase payments from the customer as opposed to themselves, this is a perk to the service we offer, and secondly, as we expand and take on more trades, I'm mindful that there could well be scope for us being 'cut out' of the job after we've provided the lead for the trade.

Apologies for the bombardment of questions, it's a frustrating concept to my head round but interesting nonetheless!

Thanks

[jpcentral]

Your idea sounds reasonable but there are issues.

I suppose your concept is similar to Amazon or ebay. With both of those the seller (ie the tradesman in your case) issues the invoice. Because Amazon/ebay collect the money and control the collection process they are able to deduct their commission during the payment process. In the model you have, I don't see how you could control the payment process. If you could it would be relatively simple to operate.

Thinking about it, if you could actually issue the invoices on behalf of the tradesman (ie showing their full details and charging VAT where appropriate) and showing the payment details as yours, you might have a reasonable element of control. I have seen something similar on an online platform for the motor trade.

If you go down the disbursement route, you will have to receive an invoice from the supplier charging VAT where appropriate to show as evidence to a VAT inspector but you couldn't reclaim any VAT charged.That shouldn't worry you too much because the end user will still be paying the quoted price.

[Josh-TB]

John,

Thanks again for your post.

It did dawn on me a couple of days ago that what I'm proposing isn't too dissimilar to ebay/amazon at all, I perhaps should have used them as an example from the outset.

Which part do you not feel we would have control over?

Our intention (as you've mentioned in your post) is to issue the invoice to the customer on behalf of the tradesman. As I mentioned previously, some of the contacts we have would relish the idea of doing less paperwork if they could so we're more than happy to do this. This means that we do control the money coming into our account, deduct our fee, and pass the remainder to the trade (a la Amazon etc...). If we could do this and in the eyes of HMRC only pay VAT on our fee, then I'm more than happy to do so!

However from an accountancy point of view, I'm slightly unclear as to how best to transfer the money to the tradesman once our fee has been deducted. Can we issue a receipt or remittance, must the trade invoice us separately? I'm not sure which would work best, but it needs to be done in a way that would also allow the tradesman to claim back the VAT on our percentage (where necessary)... You mentioned previously about issuing the invoice which clearly states our fee to the customer, this is something I would want to avoid for obvious reasons but don't know the best way to go about it. Again, when I buy goods from Amazon I'm not aware of the fees involved and I would like it to be similar for myself.

Any suggestions in this instance would be extremely welcomed.

[section 44]

Charge for arranging the service - £1,000 (£833.33 + VAT)This would seem the most likely route. My only concern would be whether the customer would construed the second item as a charge which is directed at them. Whereas the aim is for the charge to be swallowed by the trade,

... why not

act as a disclosed agent for the tradesman - charging the customer £10k, for and on behalf of the tradesman - and then you invoice the tradesman £1k plus VAT for your agency service, with you settling the invoice out of the monies that you collect as agent for the tradesman

... would seem to reflect your aim

[Josh-TB]

Section 44,

That definately reflects my aim. My concern though is;

1) the process of it all. I.e is it as simple as issuing invoice to customer (do we need to disclose our fee!?) collecting the money, forwarding 90% of the monies to the trade whilst retaining and invoicing 10% for ourselves.

2) is there a way to operate the above method without being liable for 100% of the money recieved (just our 10% cut) and if so how is this structured for the benefit of hmrc, I.e classifying ourselves as an agent etc.

Many thanks