VAT liability and contracting

[JV1975]

Good morning all,

Hypothetical question. A startup company provides counselling services, using contractors to supply the service. The young company takes 25% of the overall counselling fee to pay for marketing, admin staff and general office expenses etc, and the rest goes to the contractor who supplies the service to the client. In theory if the company was to reach VAT registration level of turnover, the already small profit would become even more negligible after paying 20% VAT and deducting business running expenses. As the cost to the service user cannot be increased this would therefore make the company not financially viable. Is there any legal way to reduce VAT liability when using contractors to supply services and where there is no materials to reclaim VAT on? This is not about avoiding VAT or Tax but giving a hypothetical young business a chance to grow before they need to start paying VAT.

Thanks in advance

 

[UK Contractor Accountant]

Yes get the Counsellors to invoice direct to patients and the start up company then invoices the Counsellors for the 25% fee.

Happens a lot in the building trade!

 

[JV1975]

Yes get the Counsellors to invoice direct to patients and the start up company then invoices the Counsellors for the 25% fee.

Happens a lot in the building trade!

Thank you for responding ? this had been considered, but there were questions around the contracting side of things… would the service contract then have to be with the counsellor providing the service and then a secondary contract in place between the company and counsellor to make this legal in the eyes of HMRC …. Or is it just who invoices?

 

[lesvatadvice]

There has been a lot of litigation on this issue, in several sectors. One key question is whether the sub-contractor supplies staff, which is always taxable, or is providing the services in question, which may be exempt.
The formal contracts as well as the practical arrangements all feed into this determination.

 

[JV1975]

There has been a lot of litigation on this issue, in several sectors. One key question is whether the sub-contractor supplies staff, which is always taxable, or is providing the services in question, which may be exempt.
The formal contracts as well as the practical arrangements all feed into this determination.

The subcontractor would be a lone worker, providing one to one counselling services, billing the company as a sole trader (or ltd). The 25% fee payable by the contractor to the company would be to cover marketing, introductions and use of the booking platform.

 

[numbersrule]

I just don't get this type of VAT question.
When we started out we registered for VAT voluntarily before we reached the VAT threshold.
When we passed the VAT threshold our Clients didn't notice.

This question has got nothing to do with profitability.

If a company has to 'absorb' VAT and thereby becomes unprofitable then the business is not viable.

If a business above the VAT Threshold shows added VAT when quoting and thereby does not win work then they may be competing against companies who do not charge VAT. So then you have to question if the market is more suited to smaller non VAT registered businesses. So the business strategy is wrong.

As far as I am concerned all the ridiculously convoluted ways round these scenarios are asking for trouble.

 

[JV1975]

I just don't get this type of VAT question.
When we started out we registered for VAT voluntarily before we reached the VAT threshold.
When we passed the VAT threshold our Clients didn't notice.

This question has got nothing to do with profitability.

If a company has to 'absorb' VAT and thereby becomes unprofitable then the business is not viable.

If a business above the VAT Threshold shows added VAT when quoting and thereby does not win work then they may be competing against companies who do not charge VAT. So then you have to question if the market is more suited to smaller non VAT registered businesses. So the business strategy is wrong.

As far as I am concerned all the ridiculously convoluted ways round these scenarios are asking for trouble.

I appreciate your time spent answering this question. This is why we are asking, to get all points of view. You seem to have understood the question clearly and given an honest answer so thank you. We had come to same conclusion as you, however there are businesses out there running this model so there must be a way of making it profitable and we were curious as to how they may be making it work. This seemed like a good place with lots of knowledge to explore this.