VAT recovery question for a company/sole trader combo

Calahonda52 · 02-07-2020 5:06pm #1

A VAT registered company and a non VAT registered sole trader are in business together: 50/50 on relevant bills and relevant expenses. All invoices issued by the company.

1: incur expenses which are paid, plus VAT by the company.
How should the company recover/account for the sole traders portion of the gross invoice

eg invoice is 100 plus VAT

2: They provide consultancy services, invoiced by the company, and paid into the company bank account.
Similar question
How should the company disburse/account for the sole traders portion of the gross fees.
say 1,000 plus VAT

Thanks as always

marizpan · 03-07-2020 8:30am

I would consider this an agent arrangement without knowing more details - disclosed or undisclosed agent for VAT purposes.

https://www.revenue.ie/en/vat/vat-on-services/exceptions-to-the-general-place-of-supply-rules-for-services/services-of-agents-and-intermediaries/index.aspx

Calahonda52 · 03-07-2020 8:38am

marizpan wrote: »

I would consider this an agent arrangement without knowing more details - disclosed or undisclosed agent for VAT purposes.

https://www.revenue.ie/en/vat/vat-on-services/exceptions-to-the-general-place-of-supply-rules-for-services/services-of-agents-and-intermediaries/index.aspx

Thanks, its not this as there is no acting on behalf

A disclosed agent is an agent who acts on behalf of another person (the principal)...
An undisclosed agent is someone who acts on behalf of another while holding himself or herself out as principal.

marizpan · 03-07-2020 8:46am

Is the arrangement more of a profit sharing arrangement while all invoiced/money received through the company?
Is the ST also a director of the company?

Calahonda52 · 03-07-2020 9:00am

marizpan wrote: »

Is the arrangement more of a profit sharing arrangement while all invoiced/money received through the company?
Is the ST also a director of the company?

Thanks again.

No, ST has no connection with the LTD Co

Let me give two examples.
Income
the employee and the ST won a tender to deliver professional services, say 10k plus VAT.
The LTD Co will issue the invoices, plus VAT.
So th 10k net is in the Co bank account.
The plan is they split it

Second example:
Expenses
They spent 1,000 plus VAT on expenses, again paid out of the Co bank account.
The plan is they split it

barneystinson · 03-07-2020 9:46am

The devil is in the detail here.

What contractual arrangements exist between the sole trader and the company?

What contractual arrangements exist between the company, the sole trader and the clients?

Who gets sued by the customer if something goes awry?

If the customer has contracted with the company to receive a service, then it's the company that is providing the service, if the company has a contract or arrangements with a third party that seems to be a separate matter.

Calahonda52 · 03-07-2020 10:26am

barneystinson wrote: »

The devil is in the detail here.

1: What contractual arrangements exist between the sole trader and the company?

2: What contractual arrangements exist between the company, the sole trader and the clients?

3: Who gets sued by the customer if something goes awry?

4: If the customer has contracted with the company to receive a service, then it's the company that is providing the service,

4a: if the company has a contract or arrangements with a third party that seems to be a separate matter.

Thanks Barney

1 None: this business grew out of Covid.
The employee is my partner who is an employee of my company.

They are friends who have different skills.

2: They bid jointly for work as say Ben and Jerry

The company does the invoicing.
Perhaps I should registered them as a business name, to connect them, however tenuously, to the company?

3: The sort of work is unlikely to lead to litigation.

4: Yes

4a: nothing agreed in writing

Marcusm · 03-07-2020 6:14pm

Calahonda52 wrote: »

Thanks Barney

1 None: this business grew out of Covid.
The employee is my partner who is an employee of my company.

They are friends who have different skills.

2: They bid jointly for work as say Ben and Jerry
The company does the invoicing.
Perhaps I should registered them as a business name, to connect them, however tenuously, to the company?

3: The sort of work is unlikely to lead to litigation.

4: Yes

4a: nothing agreed in writing

The Ltd company does not, on the basis of the facts you have stated, have any entitlement to raise invoices on behalf of the entire sum except to the extent that it is acting as an agent of the sole reader. Mere administrative convenience is not in point, in asserting an entitlement to the entire remuneration from the client/customer they are either acting as agent or as partner is a constructive partnership between your Ltd and the sole trader. In this latter instance, there should be a separate VAT registration for “Ben & Jerry” as a partnership (the relationship existing between two or more persons carrying on a business in common with a view to profit). If ylthe Altd continues to raise the full invoice and remit 50% of the income to the other person, it is running a significant risk that the other person is treated as an employee - apart from penalties, employer’s PRSI would be my most significant concern. Absent any formal legal arrangement (supported by the facts, it is hard to justify the different treatments accorded to the two human beings carrying out the activities.

davindub · 03-07-2020 11:12pm

The acceptable treatment on what is posted is:

Company invoices customer incl VAT.

Sole trader invoices company for their portion.

Company invoices sole trader for expenses (must charge VAT).

Company pays entire VAT on invoices to customer and on expense invoices to ST.

Company claims entire VAT on inputs.

The situation alone does not give rise to the sole trader being considered an employee. There would need to be other factors present.

The above stance is common enough within transport networks where you have many entities collaborating, but the customer only pays one entity.

Calahonda52 · 04-07-2020 7:44am

Thanks guys, will get the ST to register for VAT which will clean up most of the issues as I see them and stand down the Ben and Jerry part.

Marcusm · 04-07-2020 5:05pm

davindub wrote: »

The acceptable treatment on what is posted is:

Company invoices customer incl VAT.

Sole trader invoices company for their portion.

Company invoices sole trader for expenses (must charge VAT).

Company pays entire VAT on invoices to customer and on expense invoices to ST.

Company claims entire VAT on inputs.

The situation alone does not give rise to the sole trader being considered an employee. There would need to be other factors present.

The above stance is common enough within transport networks where you have many entities collaborating, but the customer only pays one entity.

The OP has made it clear thaT the employee and putative some trader carry on the same activities and functions. Treating them inconsistently for tax purposes is prima facie proof that one of them is being treated incorrectly. This is what exposes the OP’s company to significant liability against which he has simply no defence. One treatment is wrong.

Marcusm · 04-07-2020 5:06pm

Calahonda52 wrote: »

Thanks guys, will get the ST to register for VAT which will clean up most of the issues as I see them and stand down the Ben and Jerry part.

Copperfastening thebinconsistency despite identical roles will guarantee that you are exposed to a liability.

davindub · 04-07-2020 6:22pm

Marcusm wrote: »

The OP has made it clear thaT the employee and putative some trader carry on the same activities and functions. Treating them inconsistently for tax purposes is prima facie proof that one of them is being treated incorrectly. This is what exposes the OP’s company to significant liability against which he has simply no defence. One treatment is wrong.

An important aspect here is that the ST is receiving a share of the revenue and responsible for a share of the expenses.

But revenue can confirm this for the op or they have a guide to help determine the status.

davindub · 04-07-2020 6:50pm

Marcusm wrote: »

The OP has made it clear thaT the employee and putative some trader carry on the same activities and functions. Treating them inconsistently for tax purposes is prima facie proof that one of them is being treated incorrectly. This is what exposes the OP’s company to significant liability against which he has simply no defence. One treatment is wrong.

An important aspect here is that the ST is receiving a share of the revenue and responsible for a share of the expenses.

But revenue can confirm this for the op or they have a guide to help determine the status.

Calahonda52 · 05-07-2020 11:11am

So if we drop the ben and jerry piece, and register the ST for VAT, will that suffice?

Marcusm · 05-07-2020 11:24pm

davindub wrote: »

An important aspect here is that the ST is receiving a share of the revenue and responsible for a share of the expenses.

But revenue can confirm this for the op or they have a guide to help determine the status.

I disagree but YMMV. The company issues the invoice and collects the income. On this basis the ST has no claim against the client but only a claim against the company. (Note there is nothing to suggest that the ST is liable for expenses - they are met by the company out of the income.) It is not at all unusual for an employee’s remuneration to be based on the revenue they generate (eat what you kill). If the partner and the ST are carrying out the same functions in relation to the activity, there is nothing to support a different treatment as a contract for services vs a contract of service. This is why I think this is a classic case of “shooting yourself in the foot”. It might not be discovered but if it is there will be penalties.

barneystinson · 05-07-2020 11:40pm

Calahonda52 wrote: »

So if we drop the ben and jerry piece, and register the ST for VAT, will that suffice?

I'm with Marcus here, what's the actual point of what you're proposing here? Is it just to avoid a bit of employer's PRSI like, or what?

davindub · 06-07-2020 8:21am

Marcusm wrote: »

I disagree but YMMV. The company issues the invoice and collects the income. On this basis the ST has no claim against the client but only a claim against the company. (Note there is nothing to suggest that the ST is liable for expenses - they are met by the company out of the income.) It is not at all unusual for an employee’s remuneration to be based on the revenue they generate (eat what you kill). If the partner and the ST are carrying out the same functions in relation to the activity, there is nothing to support a different treatment as a contract for services vs a contract of service. This is why I think this is a classic case of “shooting yourself in the foot”. It might not be discovered but if it is there will be penalties.

Disagreement noted but honestly read the guide:

https://www.revenue.ie/en/employing-people/becoming-an-employer-and-ongoing-obligations/guide-to-pay-as-you-earn-paye/determining-the-employment-status-of-an-individual.aspx

There is a code of practice available in pdf, but I can't link to it.

Anyway, if I did think the ST was potentially an employee, they could set up a new LTD with 2 propriety directors class s.

Calahonda52 · 06-07-2020 8:37am

barneystinson wrote: »

I'm with Marcus here, what's the actual point of what you're proposing here? Is it just to avoid a bit of employer's PRSI like, or what?

Not at all!
Tax avoidance is not the issue here, I just want to get it right.
Want to know how to split fees received and expenses, both with VAT attached, paid between the company and the ST who supplies consultancy services to the company and incurs expenses on behalf of the company.

davindub wrote: »

Disagreement noted but honestly read the guide:

https://www.revenue.ie/en/employing-people/becoming-an-employer-and-ongoing-obligations/guide-to-pay-as-you-earn-paye/determining-the-employment-status-of-an-individual.aspx

There is a code of practice available in pdf, but I can't link to it.

Anyway, if I did think the ST was potentially an employee, they could set up a new LTD with 2 propriety directors class s.

No question of the ST being an employee.
The ben and Jerry model has been stood down, no invoicing has been done / no expenses have been paid / no fees have been received.

The ST will reg for VAT this am.

Whats the best way to run this past Revenue: hardly my enquiries?

Marcusm · 06-07-2020 12:19pm

davindub wrote: »

Disagreement noted but honestly read the guide:

https://www.revenue.ie/en/employing-people/becoming-an-employer-and-ongoing-obligations/guide-to-pay-as-you-earn-paye/determining-the-employment-status-of-an-individual.aspx

There is a code of practice available in pdf, but I can't link to it.

Anyway, if I did think the ST was potentially an employee, they could set up a new LTD with 2 propriety directors class s.

If would agree that there is potential for each of the individuals to be treated as self-employed. The point I am making is that there is no basis to treat one as employed and the other as self-employed, hence shooting in the foot. The inconsistency is absolute evidence that one of the treatments is incorrect. I am unsure what type of analysis you are undertaking but, in my opinion, it is blinkered. The prospect of setting up a second company needs to be done prospectively as it cannot be done retrospectively. By the time the issue is identified and challenged, there is no opportunity to rectify matters as it sounds as if this is not an ongoing situation.

Marcusm · 06-07-2020 12:23pm

Calahonda52 wrote: »

Not at all!
Tax avoidance is not the issue here, I just want to get it right.
Want to know how to split fees received and expenses, both with VAT attached, paid between the company and the ST who supplies consultancy services to the company and incurs expenses on behalf of the company.

No question of the ST being an employee.
The ben and Jerry model has been stood down, no invoicing has been done / no expenses have been paid / no fees have been received.

The ST will reg for VAT this am.

Whats the best way to run this past Revenue: hardly my enquiries?

I’m not trying to be difficult but that statement alone is fairly damning; if truly a non-employee then they have no ability to incur “on behalf” of the company. Rather they would incur on their own right and expect to have an ability to recover out of pockets if covered by the (non-existent) written contract or terms of engagement. I know that you think this is simple but your approach is wrong. Revenue would most likely not be willing nor bound by any opinion as the question of whether someone is or is not an employee is a factual one. Even fo Large Cases, myinquiries is essentially the Avenue through which Revenue’s opinion is solicited.

Calahonda52 · 06-07-2020 6:01pm

Marcusm wrote: »

I’m not trying to be difficult but that statement alone is fairly damning; if truly a non-employee then they have no ability to incur “on behalf” of the company. Rather they would incur on their own right and expect to have an ability to recover out of pockets if covered by the (non-existent) written contract or terms of engagement. I know that you think this is simple but your approach is wrong. Revenue would most likely not be willing nor bound by any opinion as the question of whether someone is or is not an employee is a factual one. Even fo Large Cases, myinquiries is essentially the Avenue through which Revenue’s opinion is solicited.

No sense at all of anyone being difficult here, I value your, and every other persons input here.

My language above was careless, its not as I described it but as how you have described it, the ST will recover expenses as you describe.
Thank you again.

Marcusm · 06-07-2020 8:49pm

Calahonda52 wrote: »

No sense at all of anyone being difficult here, I value your, and every other persons input here.

My language above was careless, its not as I described it but as how you have described it, the ST will recover expenses as you describe.
Thank you again.

Don’t take this personally but I think you would have to be cracked to do it this way. If it’s a one-off maybe it’s a limited exposure. For anything recurring, it likely won’t end well.

Calahonda52 · 06-07-2020 9:21pm

Marcusm wrote: »

Don’t take this personally but I think you would have to be cracked to do it this way. If it’s a one-off maybe it’s a limited exposure. For anything recurring, it likely won’t end well.

I will go back to the drawing board.
Nothing personal, it just is!

VAT recovery question for a company/sole trader combo

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