One area of confusion for VAT registered traders who either employ someone or use sub-contractors or other self-employed individuals, apart from the current “Making Tax Digital” debacle, is whether they can claim back the VAT incurred on expenses incurred but invoiced to those employees, sub-contractors or other self-employed individual, examples of which are salesmen, actors, and other casual workers.
A fundamental principle of VAT is that only the person to whom the supply was made can make a valid reclaim of the VAT incurred. However, this may be different to the person who has paid for the supply or who holds the relevant invoice or other documentary evidence. This has been brought to the fore recently when legal fees were incurred in the name of the company’s director, but more frequently relate to motoring and travel costs or small tools and purchases made “on-site”.
Looking at sub-contractors and other self-employed individuals first, it is normal that if that person is himself VAT registered then he will reclaim the VAT. Also, if he has quoted for the work inclusive of labour and materials then the cost of those materials, and associated VAT, are incurred by him.
Another factor is whether the individual works for more than one contractor at the same time. This may, for instance, apply to a salesman who in the course of a day may represent several companies. Under these circumstances, the expenses cannot be attributed to a specific contractor, and so the expense, and associated VAT, again are incurred by the individual.
However, many sub-contractors are “employed” by one company on a labour only basis and are paid in the same manner as an employee on an hourly rate or on a piece-work (ie commission) rate. Under these circumstances, and provided that the individual does not receive any direct payments from the end customer, the tax office will treat them on the same basis as employees for the purpose VAT input recovery. Therefore, the following statement applies to employees, including directors of one-man companies, and labour only sub-contractors and self-employed individuals who work for one company. For simplicity, we will refer to these as employees.
If an expense is incurred by an employee in the course of his employment then, provided the expense is fully paid or reimbursed by the employer then the employer can treat the expense as being incurred by themselves even if supplier raised his invoice in the name of the employee.
Phew, I nearly gave a high-five and shouted “simples” after writing that last paragraph, but whilst that final statement may indeed sound simple the previous three paragraphs have formed the basis of many disputes between the taxpayer and the tax office!
WatkinsonBlack have considerable experience in all areas of taxation and business services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.