Disbursements on VAT Flat Rate Scheme

[gbrown100]

Hi all,

Sorry for the long post!

I have a Ltd IT company that is on the VAT Flat Rate scheme. We often buy software or services on behalf of our clients which are generally small in cost such as £50 or £100 here or there. Not having an accounting background I generally wacked on a percentage to cover the VAT we would have to pay on the invoice value and invoiced it as "Supply & Install of...". My understanding is that as long as I am not profiting from the supply of the item / software I could treat it as a disbursement as long as I invoice it correctly. I.e. if I then need to charge an install cost I would list that separately on the invoice.

This year I have contracted a developer to write an application on my client's behalf. My work was simply to draw up a specification, project manage the application development and testing the resulting application to ensure it worked as per the client requirements. He is charging me £1500 to develop the application, I have quoted the client a total price of £2100 ex vat. It was made clear to the client that the development work would be sub contracted.

I want to treat this as a disbursement so I don't have to pay VAT on the £1500. I'm pretty sure I am entitled to do this as I had no hand in the development, just testing it on behalf of the client. What I don't know is how to invoice the client. Two accounts people have given me two different answers. They are:

A: Add the INC VAT figure from the developer on the invoice then show the ex vat project management / testing fees on another line as ex vat. Add the VAT to those fees to make up the total figure.

B: Add the ex vat figure from the developer and a second line with the ex vat figure for our project management and then total VAT as normal

Can anyone tell me which is correct and just for my own sanity does it really sound like I can treat this as a disbursement?

Also, how do you record the disbursement when submitting the vat return?

Thanks

Graham

 

[elaine@cheapaccounting]

Here are the rules ...

http://www.hmrc.gov.uk/vat/managing/charging/disbursements.htm

 

[elaine@cheapaccounting]

It has an example similar to yours in there

 

[gbrown100]

Hi Elaine,

Thanks for the response and for the link, I have already read it but now understand where it goes in the invoice (must have missed that bit before). I guess I need to re-word my questions slightly now:

1. As I am flat rate I do not recover VAT suffered I simply pay a reduced rate on the invoice total. Does this mean that I still have to pay the full 14.5% of the invoice total? If so, what exactly does treating it as a disbursement actually do for me?

2. Can my client reclaim the VAT on the full amount?

In my head, I seemed to have to idea that if I treated the figure as a disbursement I would only pay VAT to HMRC on the project management fees not on the amount of the invoice.

Thanks

Graham

 

[elaine@cheapaccounting]

Ah right I see - so you need to read the flat rate guidance ...

Your flat rate turnover is all the supplies your business makes including all:

• VAT inclusive sales for standard rate, zero rate and reduced rate supplies
• sales of exempt supplies, such as rent or lottery commission - you don't have to make any partial exemption calculations
• sales of capital expenditure goods - unless you have previously reclaimed the VAT, in which case they must be accounted for at the standard rate and not the flat rate.
• sales to other EU countries
• sales of second-hand goods - but if you sell a lot of these, you may be better off leaving the Flat Rate Scheme and using a margin scheme

Don't include:

• services you've purchased from outside the UK that you've had to reverse charge
• disbursements - costs you pass on to your clients that meet the necessary VAT conditions
• private income, for example income from shares
• bank interest received on a business account
• the proceeds from the sale of goods you own but which have not been used in your business
• any sales of gold that are covered by the VAT Act, Section 55 - see the link below
• non-business income and any supplies outside the scope of UK VAT
• sales of capital expenditure goods on which you have claimed back the VAT you paid

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#7

 

[gbrown100]

Excellent - I new I had seen it somewhere!

So to my client... Are they able to claim back VAT on the full amount (i.e. 20% of £2520) or can they only claim back VAT on the £720 which is my part of it? If it tells me in either of these documents I can't tell, it's a little ambiguous...

 

[Scalloway]

If the invoice is addressed to your client they can reclaim all the VAT.

 

[gbrown100]

But if the invoice is addressed to my client am I allowed to pay it and still treat it as a disbursement?

Assuming so, would I send my client both my invoice and theirs?

 

[Scalloway]

Reading Elaine's 3rd post

Don't include:

• disbursements - costs you pass on to your clients that meet the necessary VAT conditions

You charge the client the cost of the software supplied plus VAT, which they reclaim. You DO NOT include it as part of your turnover for calculating your VAT payment to HMRC.

 

[gbrown100]

And according to her 1st post I have to do the following:

The consultant's invoice to their client for this work might include the following items:

• design services - £2,500
• travelling expenses - £300
• amount on which VAT is due - £2,800
• VAT at 15 per cent - £420
• disbursements - £150
• total including VAT - £3,370

So in my case it would be:

Project Management / Testing £600
VAT @ 20% £120
Disbursements £1800
Total including VAT £2520

So what I am asking is, if I present my invoice to the client as per the above can they claim the VAT off of the £2520 or the £720?

I think I then misunderstood your answer below:

If the invoice is addressed to your client they can reclaim all the VAT.

I took that to mean that "if the invoice from the developer is addressed to my client" since I cannot see any reason why I would present my invoice to my client without their address on, that is just common sense! So basically in the scenario above my client is not any worse off by me treating the developers work as a disbursement.

Thanks for all of your time and patience

Graham

 

[Scalloway]

You say you are on the Flat Rate Scheme. Ignore her 1st post and read the 3rd which is the correct approach.

Bill your client for the full amount plus VAT at 20%
They reclaim the 20%

You pay HMRC 14.5% on YOUR PART of the bill
You IGNORE the VAT charged on the disbursement part and DO NOT pay HMRC 14.5% VAT.

 

[Anna Chandley]

You say you are on the Flat Rate Scheme. Ignore her 1st post and read the 3rd which is the correct approach.

Bill your client for the full amount plus VAT at 20%
They reclaim the 20%

You pay HMRC 14.5% on YOUR PART of the bill
You IGNORE the VAT charged on the disbursement part and DO NOT pay HMRC 14.5% VAT.

I have to disagree with Scalloway here. If the disbursement is a qualifying VAT disbursement then Graham should not charge VAT on this cost. The cost should be shown on the invoice as a disbursement at the VAT inclusive cost.

If VAT is charged by Graham on the disbursement then it would count towards the turnover for flat rate.

Anna

 

[gbrown100]

Hey guys, now you see why I was confused... You are both echoing the two different stories I was told.

I *thought* that the comment from Anna was correct before I went into this whole exercise but my accountant disagreed. My sister in law being a part qualified accountant (only part courtesy of having a child) agrees with me.

 

[Anna Chandley]

You have a choice when it comes to qualifying disbursements.

1. Treat as a VAT disbursement and do not charge VAT nor reclaim VAT on the supplier invoice.

2. Treat as a normal taxable supply and charge VAT on the recharge and reclaim VAT on the supplier invoice.

If you choose to charge VAT on the disbursement amount it means you have chosen option 2 and this becomes a taxable supply to be included in the flat rate calculation.

Anna

 

[elaine@cheapaccounting]

You say you are on the Flat Rate Scheme. Ignore her 1st post and read the 3rd which is the correct approach.

Bill your client for the full amount plus VAT at 20%
They reclaim the 20%

You pay HMRC 14.5% on YOUR PART of the bill
You IGNORE the VAT charged on the disbursement part and DO NOT pay HMRC 14.5% VAT.

My first post quoted the HMRC advice on how to treat disbursements. My 3rd post detailed how to treat the disbursement turnover for flat rate purposes.

The two run along side each other as echoed by Anna in option 1

So please do not ignore post one

 

[gbrown100]

You have a choice when it comes to qualifying disbursements.

1. Treat as a VAT disbursement and do not charge VAT nor reclaim VAT on the supplier invoice.

Reclaiming VAT is irrelevant isn't it? I am flat rate. So are you saying:

I quoted £2100 + VAT for the whole job - they are expecting a bill for £2520 inc

The Developer charges £1500 + VAT ergo it costs me £1800

I invoice my client as follows:

Project Management / Consultancy £600
VAT £120
Disbursement £1500 *developer ex vat figure
Total £2220

I Pay VAT on £720 @ 14.5% = £104.40
My client can only claim back VAT on £720 = £120 (But they actually got charged £300 less so it works out the same for them)

In total before Tax I get £420 - £104.40 = £315.60

However If I just lump the whole lot in at £2100 + VAT and invoice at £2520 inc I pay 14.5% on that invoice total = £365.40. Less the £1800 and I make £354.60.

It just seems daft as it goes against the rule that I claim back exactly what I pay - the whole reason for a disbursement...

 

[Anna Chandley]

If you treat the developer cost as a VAT disbursement then your invoice will be

Project Management / Consultancy £600
VAT £120
Disbursement £1800 *developer inc vat figure
Total £2520

Your client can claim back the £120 VAT on your supply and the £300 on the developer cost for which you would need to provide them with the developers invoice.

Anna