VAT on contractor income

[monkey13]

I do subcontracting work for a large company. They charge the customer an amount for a job including VAT. They then take a commission for the job and pass on the remainder to me.

So for example on a small job the customer will be charged £78 (£65 + £13 VAT). From the £65 they take their commission £13 inc VAT and pay me £52.00.

So my income at the end is £52.00. As I’m VAT registered am I then liable to a VAT payment on that of £10.40? Really only leaving me with £41.60.

[Trevor S]

You need to establish what the contractual arrangements are.  It’s likely to be either:
1. There is a direct contract for the work between you and the ultimate customer, and this other company is acting as your agent in making the arrangements; or
2. There is no direct contact between you and the ultimate customer – instead you are contracted to supply services to this other company, and they are contracted to supply services on to the ultimate customer.

From your question, I’ll assume it’s the first of these.  If it’s the second one, let me know and I’ll re-work it.  I’m also going to assume that you’re not involved in the construction industry, as there are some different rules there.  Again, let me know if it is construction-related.

The other company is collecting the £78 on your behalf. The £13 VAT element of this is for you to pay to HMRC on your VAT return, not for the other company to deal with. The £13 (incl VAT) fee deduction that the other company makes is an expense to you, so you’re entitled to reclaim the VAT element of this (£2.17) from HMRC – you’ll need a VAT receipt or receipted VAT invoice from them to support this, in the same way as any other business expense.

If this is the case, the other company should pay you £65.00 – the amount that they’ve collected from the ultimate customer, less their fee. You will need to pay HMRC the £13.00 due on the ultimate customer’s payment, less the £2.17 recoverable on the other company’s fee. That leaves you £54.17, which is the £65.00 from other company, less the £13.00 VAT you pay to HMRC, plus the £2.17 VAT on the fee, that you reclaim from HMRC.

[monkey13]

Hi Trevor. I think it’s more like option 2. The users deal direct with the company, book their jobs, pay, etc through the company’s platform.

I just turn up and do the work. 

They are a v large firm and only pass on the amount ex vat and commission.

[Trevor S]

The reason that I’d assumed option 1 was because:

• you knew how much the ultimate customer was paying – this would be unusual if there was no contractual relationship between you and them, as the amount would be irrelevant; and
• the terms “retained by them” and “commission” might imply that the amount paid by the ultimate customer is “your” money, just being handled by the company.

If it is option 2 and you’re VAT registered, then whatever income you receive from the company needs to be subject to VAT.  They would be able to recover any VAT you charged them.  Is it possible that some people who do work for them aren’t VAT registered?  If so, if you told/proved to them that you are VAT registered, would they pay you £52+VAT, instead of just the £52?

If the company is a very large firm, I’d expect that there are detailed contracts or terms and conditions documents in place?  If so, may be worth asking your accountant or an advisor to read through them and give their view on whether the company is:

• your agent in your supply to the ultimate customer (my option 1); or
• your customer and a principal in the supply to the ultimate customer (my option 2).

The amounts in this example may be small, but the potential for VAT errors could become more significant if you start to do a lot of work through/for them.

As before – I’m assuming that the work isn’t construction-related, as there are different rules for contractors and subcontractors in the construction industry.

[Author]

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