Tax implications for sub contracting work but customer pays us

[PDM31]

I run a company whereby we pay for adverts and attract customers for our clients. We then send these leads to our clients who go and quote for the job at their house. We then get charged a % of the sale.

In order to track correctly and make sure the sub contractor isn't lying to us about jobs, I was thinking of having the customer pay my company then we pay the our clients (the sub contractor) who's done the job. However I know this will over inflate our revenue.

Let's say the job is £200. The customer pays us £200, our fee is 20%, so we keep £40, then have to pay the sub contractor £160.

Is this likely to have adverse tax implications?

 

[Scalloway]

You need to make it clear that you are handing the money on behalf of your subcontractors and your income is only the commission you receive. This is important if you are not VAT registered.

 

[PDM31]

You need to make it clear that you are handing the money on behalf of your subcontractors and your income is only the commission you receive. This is important if you are not VAT registered.

Make it clear to who and how?

 

[Scalloway]

You need to make it clear to the customer you are acting as a disclosed agent on behalf of your subcontractor.

 

[PDM31]

You need to make it clear to the customer you are acting as a disclosed agent on behalf of your subcontractor.

Yes but I'm talking from a tax perspective. Our revenue is going to increase substantially so I assume we'd have to go VAT registered. Just wondering on the pros and cons of doing it this way.

 

[Scalloway]

It is your commission that is your income and counts towards VAT registration. Money you get from customers and pass on to subcontractors is not counted towards your VATable turnover if you set it up correctly.

 

[Frank the Insurance guy]

Hi @PDM31

Just a warning that you need to consider more than just your VAT where you are invoicing for the full cost of work.

This is likely to increase your liability and you are likely to be responsible for the work of the sub-contractor. As the customer is paying you for the work, they will hold you responsible for the sub-contractors work.

If you go down this route I suggest you make sure:
1. any sub-contractor has full Public and Products Liability Insurance
2. Their Insurance includes an "Indemnity to Principal Clause" - this means their liability insurance policy will protect and defend you/your business if a claim is made against you where the claim relates to the sub-contractors work
3. You arrange your own Liability Insurance, to include sub-contractors on a "contingency" basis - eg. if a sub-contractor goes bust, "dissapears" or there insurance policy fails - your own Insurer will deal with the claim as if you were the sub-contractor.

 

[NicoJ]

Added to Frank's post, my initial thoughts were that you would have to operate a client money account which opens you up to further regulation.

Maybe you need to look at your contracts with your sub contractors. Why are you passing business their way if you don't trust them?

 

[PDM31]

Thanks for your reply everyone. Great point Frank and something I hadn't thought about. It's probably going to be a lot easier trusting them instead.

It's not that I don't trust them, but working with 50-100 of them it's probably going to happen at some point. I know my wife goes into salons via treatwell and such places and they tell her to mark it down as cancelled on treatwell so they don't pay commission.

 

[Newchodge]

Is this in the construction (or related) industry? If so you need to worry about CIS as well.