Can I Recover VAT on Reimbursements to Self-Employed Staff and Contractors
Sadly Steve Allen died in July 2011. His wife Leah would like to thank all those who know Steve and helped contribute to his success. She has recommends Steve's clients and anyone who is interested in this article topic to contact Rob McCann from “The Vat people” on (tel) 0161 477 6600 . Please make reference to Steve Allen.
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HMRC accepts that supplies that are, prima facie, made to employees, can be
treated as if they were supplied to the employer provided the employer meets the
full cost, and they have a legitimate business purpose.
For example: subsistence costs, removal expenses for staff relocation, and
‘petty cash’ purchases.
Self-employed and contractors
The difficulty comes when you are dealing with self-employed consultants and
contractors. If they are VAT registered, it should not pose much of a problem.
They include their subsistence and other similar expenses as part of their
component costs to you, charge VAT on the whole amount, and you claim it all
back on your VAT return.
Not VAT registered
If your outside consultant or contractor is not VAT registered, this can pose
a problem, because he will pass on to you the VAT he pays on his costs, but you
can’t claim it back because you don’t have a VAT invoice.
Example: He incurs a hotel bill of £100 plus VAT of £17.50 in connection with
the work he is doing for you. Being unregistered, he passes on the total cost to
you (i.e. £117.50) - you have no VAT to reclaim.
Tip. HMRC accepts that many businesses now find
themselves in this position, and incur irrecoverable VAT as a result. In these
circumstances, where a business reimburses subsistence, road fuel, and other
motoring costs incurred by the self-employed person working for your business,
HMRC will allow you to recover the VAT
on these costs provided the following conditions are met:
- The individual is “employed” on the same basis as an employee, i.e. is
paid on a fixed hourly rate, being unassociated with the trading profits of
- The individual incurs the expenditure only in respect of “employment” by
the business. Where the individual represents a number of firms at the same
time (e.g. a self employed salesman), any subsistence does not relate to one
‘employer’, and none of those firms can treat the VAT incurred as input tax.
- The individual receives no payment from the end customer.
- The business reimburses the individual at cost, including VAT, putting the
expense in the normal business accounts (and getting a VAT invoice).
In addition, if the self employed person is a labourer or contractor, and
purchases tools or materials to use on a specific job for your business, the VAT
Officer may accept that the VAT incurred is your input VAT provided, in the case
of tools, they become the property of your business, and, in the case of
materials, they are incorporated into, and become a component cost of, the
supply by your business to the final customer.
Tip. If you engage a self-employed person to work for
you, find out if he is VAT registered, if he is not, explain that you would like
to treat any reimbursements that you make to him in this manner, in order to
maximise your VAT recovery.
Tip. Remember to get the VAT invoice from the
self-employed person, and, as far as possible, treat it in the same way as
reimbursements made to employees.
Tip. It is always possible that when you are visited
by a VAT Officer, he will query this treatment. If he does, quote him his own
internal guidance which states that this treatment is acceptable. The guidance
is found in HM Revenue & Customs Manual V1-13, Section 7, paragraphs 7.4
About the Author
Steve Allen is the
Director of VAT Solutions (UK) Ltd, an established independent firm of Chartered
Tax Advisers, formed by Andrew Needham and Steve Allen. Both not only are
respected tax advisers, but have worked for both Customs & Excise and one of the
top four accountancy firms for many years. This mean that their team know both
sides of the equation and are truly experts in this field.
The company has a cross-section of clients from multi-national companies
through to medium-sized and numerous smaller regional firms of accountants and
solicitors. They produce a regular publication 'VAT Voice', which can be
downloaded directly from their website
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Article Published/Sorted/Amended on Scopulus 2008-07-29 13:35:29 in Tax Articles