using inc VAT or ex VAT when working out project budget?

[flyinginsect33]

Hi all, really need some help resolving an issue I just can’t get my head around.

I have done some work for a friend, who has a ltd company which has recently become VAT registered.
I am a freelancer/sole trader, and am not VAT registered.

He asked me to give him a price to build something his customer needed as part of a larger project he was hired for, but was outside his skillset.
We agreed the work would cost about £1000. I expected to spend roughly £100 on materials, whatever was left over would cover my time.
He of course has charged customer £1200 for this element of work, which is the project budget plus VAT, which is fine.

So, I have a £1000 budget to complete my element of the project, for time and materials.
The plan was he would buy the materials using the company account and whatever was left over, was my fee for my time. I would simply invoice him for the difference.

The problem we are having, is out of the £1000 project budget, his company paid £120 for materials, all materials included VAT at 20% – so £20 of that is VAT he has paid out.

I believe that because he can claim the VAT back, only £100 has actually been spent from the £1000 project budget, leaving £900 available for my time.
He believes that as £120 has been spent, only £880 is available for my time.

Who is right?

My issue with his way of seeing it, is that after I have my £880 and he accounts for materials at £120, it does indeed add up to £1000. fine.
But later on, he will reclaim the £20 he spent on materials.

So the way I see it, the customer made £1000 available for a job, £880 was spent on labour, £100 was spent on materials, and £20 is just left over in his bank account.

Why am I wrong about this? Can anyone please help me see his way of thinking? he claims my method leaves him paying VAT twice?

Thanks in advance for any help ?

[Trevor S]

Firstly, I’m assuming that the invoices for the materials were in the company’s name. If they were addressed to you, the company cannot reclaim the VAT even if they paid the supplier.

If the invoices were in the company’s name, either of you could be right! You need to establish the contractual arrangements between the parties. Was anything formal ever drawn up? The possibilities I see are:

1. You are supplying your time only, to carry out work using materials owned by the company; or
2. The company has “subcontracted” the project out to you in full. Therefore if they have bought materials, there is an implied sale of those materials on to you.

Under option 1 above, the company charges £1,200 and pays £200 to HMRC, leaving them with £1,000. They pay the materials supplier £120 and reclaim £20 from HMRC. This leaves them £900 to pay you.

Under option 2 above, the company need to “sell” the materials to you, and will have to pay VAT to HMRC on that sale. So they pay you the £1,000 that they got from their customer, and at the same time charge you £120 (£100 + VAT) for the materials sold to you – which leaves you with the £880.

If there’s nothing formal in writing, best place to start would be by working out whether you have ever had any control / ownership of the materials.  If you have not, then it’s likely that you’re supplying your time only – option 1 above.

[flyinginsect33]

Hi Trevor, 
Thank you for taking the time to reply.

Yes, invoices were in his companies name.
So it does seem we were both right! We did have an initial verbal agreement that we would do it my way, but it was also mentioned at the time that he would confirm with his accountant that this would be ok.
I think what happened is, his accountant is employed to save him money, not me. So because there was no legal reason to approach it my way, they weren’t going to.

Which is actually fine tbh, if they just said that. My major issue was that I was being told I was just outright wrong, both legally and on my maths, but refused to discuss why. Just “this is the way it works, stop talking about!”
Rather than just telling me they wanted to do it in the companies favour, not mine, because it benefits the company and I had already been paid enough. (job took me a lot longer than expected, but whatever lol)
He did have a couple of unexpected costs during the project on his side too, so this really was an attempt to cover those costs, by going back on our initial agreement. But he just didn’t say that at first, he wasn’t being completely upfront about why the situation had changed. 
That upsets me way more than missing out on a few quid.

We have spoken and resolved it now, and he did in fact confirm everything I have said above. He did see an opportunity to do it in his favour and went with it, but lied to me about the reasons why.
So from now on, any work we do I will just buy materials myself and charge his company and I’ll be a lot more wary of verbal agreements. 
all’s well that ends well.

Thank you for your help on this one.

[Author]

Posts