Charging VAT on invoices

[champagnemum1]

My dh has recently started a limited company and is working as a consultant going into factories on fixed term contracts charging a daily rate plus expenses and mileage. His expenses are fairly straight forwarded as they are hotel bill (VAT included on his receipt) plus restaurant receipts and receipts from M&S/Asda etc for lunch items.

When I invoice the company he is working for, I know that I charge for how many days he has worked that month i.e. 20 x daily rate plus 20% VAT but I am unsure about the expenses. I have been on the HMRC website and its as clear as mud to me! I understand the difference between a disbursement and recharge and only the recharge bit applies to us as my DH will never be buying something on behalf of the company but my question is do i add up all his expenses for the month and then add VAT on top even if it has already been included in the hotel bill or not?????

Hope that all makes sense

They're likely to be vatable expenses but it depends on what they are. Mileage will be a vatable expense. Lunch is subsistence and won't always even be corporate tax deductible. Restaurant receipts are likely to be corporate entertainment and again are not corporation tax deductible. Are you clear on the difference between the corporation tax, the vat and the income tax/dividend tax treatment?

If he's only just set up as a limited company isn't he on the flat rate system or does he earn too much? It would save him money if he was on the flat rate scheme.

corporation tax deductible

I have no idea about the different types of tax!! He is expecting to earn over £150,000 a year if that makes a difference for the flat rate scheme?

The restaurant bills are for his evening meal just him no one else from the factory (if that makes a difference for corporate entertainment?)

We have an accountant who gave him advice about setting up a company when he was thinking about consultancy work, but then the business took off within a few days of the meeting. I have spoken to someone junior at the accountants firm but I don't feel I was given all the advice I need. I am going to make an appointment with the senior person but just wanted to get a few things clear in my head!

He has set up a company.

The company earns the money not him.

The company charges vat, he doesn't.

The company charges vat at 20 percent on his services and any expenses which he has incurred but is recharging to the client.

the company then pays this to HMRC on the quarterly vat return.

the company then pays 20 percent corporation tax to HMRC on the profit he has made each year. The profit is calculated by subtracting allowable company expenses from company income.

Out of what is left (profit) the company can declare a dividend for him as shareholder. He will then pay tax on that dividend. He should probably also pay himself a small salary to keep up his NIC contributions.

(Im not an accountant but run a business)

Do you provide/attach his expenses receipts to the invoice when you send it to the client? If they require receipts it might be possible to do an invoice+vat for his actual work, and a separate 'expenses claim' for the other stuff with just the total for them to reimburse.

You'll need the expenses receipts for the company accounts.

The expenses are vatable. You have to charge vat on them. He can't just put in an expenses claim like an employee because he's not an employee.

That is the clearest advice I have been given thank you so much!!

I have obviously submitted an incorrect invoice as I have only added VAT onto his daily rate and mileage but not his other expense (after the junior accountants advice ) so basically there are 3 elements to the invoice daily rate, expenses and mileage and everything needs an additional element of VAT adding to it.

Thanks once again for helping

yes dh keeps all his receipts and provides a copy together with the invoice. It actually makes next months invoice so simple to do as dh keeps a spreadsheets of his expenses and mileage so i can just take the end of month figures and put them into the invoice together with days worked and multiply everything by 20%!

I use a simple three column invoice. Fees, vatable disbursements and vat (on the lot)

He will then pay tax on that dividend

That's not correct is it? Dividend comes out of the profit which has been taxed (corporation tax) so it's not going to be taxed again....

Of course its correct. You don't think dividend income is tax free do you?

The company has paid corporation tax.

The OP's DH will pay tax on his dividends and also on any salary he takes.

But it's not tax free if corporation tax has been paid on it. What am i missing? Off to google it.....!

Have just seen this but i think i need an accountant to comment!

"You pay no dividend tax at all on the dividends you receive within the ‘basic’ tax band – i.e. on the first £31,785 (2015/16) after taking into account the personal allowance.

So, there is no additional income tax to pay below £42,385."

The tax you pay on dividends is different to the normal tax rate.

The company has paid corporation tax which means that if the dividends are minimal then there will not be further tax to pay. However the OP's DH is going to be "earning" approximately £150k which means there will certainly be tax to pay on the dividends.

You also need to remember that the dividend is currently grossed up by the 10 percent dividend tax credit when calculating the taxable income for the year. So if you pay yourself £10k then for the purposes of calculating your taxable income for the year you have actually had £10k x 0.9 = £11,111

You need to speak to an accountant perma.

If the main supply is VATable (i.e. the time), then the associated supplies such as travel, meals, hotel etc will also be VATable.

But, the amount to charge is the net amount to you, not the gross. So if the hotel bill is £100 plus VAT total £120, your invoice will also show £100 net plus VAT £120. The customer/client won't be impressed if you try to charge £120 plus VAT £144 and may well refuse to pay. Your OH will reclaim the VAT on the hotel on his VAT return, hence his net cost is £100 not the £120 which is why he should only charge the £100 net plus VAT.

As kjwh says make sure you don't double count the VAT. From some posts above there's a risk you could do this.