Q:
Hi All
I recently incorporated a limited company to carry out drainage services to homes and commercial properties. This company is not VAT registered as it really hasn’t started to get off the ground.
Having said that, last week I went to price works at a commercial site that amount to a figure of ~£20k. This work is too much for my small business to handle at the moment, so I went to a competitor who is capable of doing this and had them cost it, before I added a small percentage and provided the customer with a formal quote.
My question is thus: the sub-contracting company is VAT reg, my company is not. I have provided a quote that said that the works are to be carried out in partnership with the other company. I have included VAT on the quote, as it was my intention to have the other company bill on completion of the works, and I then invoice them for my cut.
Can anyone shed some light on this? I started to get the ball rolling this morning on HMRC’s website in applying for VAT reg, though as I don’t expect to be billing near the threshold over the next 12 months, I’m not sure if I’m wasting my time.
Thanks in advance for any assistance.
Jon
A:
Hi Jon
Unfortunately there isn’t a simple answer to your query as it raises a whole load of different VAT issues and it’s not possible to explain them all here on the forum. In fact I wouldn’t normally try to deal with such situations here but I do get a lot of queries about subcontractors and VAT so it’s worth spending a bit of time explaining the main principles.
I’m sure you’ll be able to work out how to proceed once you’ve sorted the contractual arrangements as I’ve explained below. However I would strongly suggest that you find a good accountant to help you sort things out if you’re still confused.
The main reason that you can’t find any helpful information on the HMRC website is that the situation you describe is very unclear – you talk about subcontractors and partnerships and it’s not clear who will be supplying the final customer with the services.
Subcontractors and VAT
Under a typical subcontractors’ arrangement, the subcontractor supplies services to the main contractor, who then makes an onward supply to the customer. This fits into the VAT system as follows:
• The subcontractor charges VAT on their invoice to the main contractor. The VAT charged is the subcontractor’s output tax and the main contractor’s input tax.
• The main contractor recovers the VAT charged by the subcontractor on its VAT return and charges output tax on the invoice to the final customer.
This setup is very typical for services in the construction and related business sectors. Like any normal commercial situation, the VAT basically flows through the “chain of supply” so that one business charges the VAT and another business recovers it.
So before you can work out the VAT position, you need to establish the proper contractual position between yourself, the subcontractor and the final customer. You’ll need to discuss this with the subcontractor but I suspect that they’ll expect to invoice you for their services and for you to invoice the customer. It is possible that they could see the arrangement as a partnership, but there really wouldn’t be any VAT benefits for doing this.
And on the basis that you are acting as a main contractor as outlined above, I suspect you’ll find that the subcontractors are familiar with dealing with this sort of situation so will already have established contracts and invoicing arrangements in place.
Registering for VAT?
So given that situation, the important issue is whether or not you, i.e. your limited company, should be registered for VAT. It’s not clear from your question whether or not you want to be registered, or whether the issue has simply risen because of the fact that you have to get the VAT registered company involved in order to win this contract.
There are both advantages and disadvantages from being registered for VAT.
The main implication is that once you (i.e. Jon the Drainage Guy’s company) register for VAT, you have to charge/pay VAT on all of your income. This means that the services you provide to both private and commercial customers are liable to VAT.
Disadvantages of being registered
As a service supplier this could mean that your services to private customers are more expensive than businesses that are not registered for VAT, so you might want to continue not being registered for the time being in order to keep your prices as low as possible, especially useful when you’re starting up a new business. So being registered could be a disadvantage when it comes to doing business for private customers.
Advantages
The main advantage of registering for VAT is that it enables you to recover VAT on the businesses purchases and expenses and particularly in respect of services supplied to VAT registered suppliers and customers. So I assume that you want to register because in this case, you’re dealing with business customers who can claim back the VAT.
NB You mention that your quote states that you are working in partnership with the subcontactor. However I suspect that you’re not referring to any formal sort of partnership arrangement, simply the subcontractor arrangement explained above. But if you want to be in partnership, the partnership would have to be registered for VAT and this would simply add another level of administration and I certainly wouldn’t recommend it for VAT purposes.
Do you have to register?
Even though you’ve mentioned VAT on the quote and the other company is VAT registered, it still doesn’t mean that your company has to register for VAT unless the value of this work takes your company over the VAT registration limit. But if you don’t register, you won’t be able to issue a VAT invoice to the customer or recover the VAT charged to you by the subcontractor.
However you can choose to register on a voluntary basis even if your company’s turnover is below the VAT registration limits, regardless of this particular contract.
So I’ve set out below two alternative illustrations for invoicing depending on whether or not you are registered for VAT.
NB When you say that you got the other company to cost the work, I assume that they gave you a quote in writing, rather than sending it to the ultimate customer. I assume that you want to issue the final bill to the customer rather than have the sub-contractor billing the customer direct so that you can add your profit on top and issue the invoice to the customer in your company’s name.
Invoicing
There are 2 different ways of doing it depending on whether or not you’re registered for VAT:
Not registered
If you don’t want to register then you’d take the price they have quoted (including VAT – e.g. £20,000 net plus £4000 VAT; £24,000 in total) and added your own percentage on top, e.g. £1000, so that the total price to the customer is for £25,000. As you are not registered for VAT, you can’t add VAT on to the final invoice, so the total cost to the customer is £25,000.
The obvious downside in this case is that the customer doesn’t have an invoice addressed to it that it can use to recover the VAT from the other company, so the job ends up costing them an extra £4,000 because you aren’t registered for VAT and can’t claim the VAT back on the subcontractor’s invoice.
Registered
If you register the company for VAT, then you would be able to recover the VAT (ie using the above example £4,000) on the cost of the subcontractors’ work as input tax.
You would then issue an invoice to the final customer incorporating the net cost of the work, i.e. £20,000, plus your own percentage, i.e. £1000, so that the net value of the work is £21,000. You would then add VAT at 20% to this amount; i.e. £4200.
The total of the invoice would therefore be £21,000 plus £4200, i.e. £25,200. Assuming that the customer is registered for VAT (and is entitled to recover its’ input VAT), they could then recover the £4200 VAT as input tax. So the cost to them after claiming the VAT would actually be £21,000.
You must not charge VAT on an invoice unless you are registered for VAT. If you do so, the VAT charged is payable to HMRC as though you were registered, plus charging VAT when you’re not registered for VAT is both criminal and civil offence. HMRC take such offences very seriously. So make sure that you’ve got your VAT registration sorted out before billing the customer.
In these circumstances, I guess that you’ll want to register for VAT but I’m sure you appreciate that the VAT issues can be complicated and messy and I’ve only been able to give some very general guidance, not advice in any formal sense. However I hope this information helps you to decide how to proceed, but I’d strongly recommend that if you’re still in any doubt, you should find a good accountant who can help you sort out the accounting and VAT issues properly.
Marie