Overview
VAT (Value Added Tax) is a tax added to most products and services sold by VAT-registered businesses. Businesses must register for VAT if their VAT taxable turnover exceeds £90,000. They can also opt to register voluntarily if their turnover is below this threshold.
This guide is designed to help agency directors understand VAT obligations and implications. For further advice, please consult your accountant or financial advisor.
Agency VAT FAQ's
Why does my Agency have to be VAT Registered?
If your agency is not VAT registered, you will not charge VAT to your client, but you may still have to pay VAT to your contractors.
Why would I have to pay VAT to the contractor?
All contractors operating through VAT-registered Limited Companies will add VAT to their invoices.
All contractors paid via UK Umbrella Companies will have VAT added to their pay.
Why does this matter?
If your agency is VAT registered, you can reclaim VAT on amounts paid.
If your agency is not VAT registered, you cannot reclaim VAT, making VAT an additional expense.
VAT Scenarios
Scenario 1: Contractor VAT registered, Agency not VAT registered
The contractor invoice will include VAT.
The client invoice will not include VAT as the agency lacks a VAT number.
If HMRC grants VAT registration with a backdated effective date, the client invoice will need to be reissued with VAT.
The invoice for Raise's fee will include VAT.
If the agency is not VAT registered, VAT on the contractor invoice and Raise fee will be an unrecoverable expense.
Scenario 2: Contractor VAT registration pending, Agency VAT registered
The contractor invoice will not include VAT.
The client invoice will include VAT if the client is within the UK VAT domain.
The Raise fee invoice will include VAT.
If the contractor later registers for VAT with a backdated effective date, their invoices will be reissued with VAT. The agency must pay this VAT but can reclaim it from HMRC.
Scenario 3: Neither Contractor nor Agency VAT registered
The contractor invoice will not include VAT.
The client invoice will not include VAT.
The Raise fee invoice will include VAT.
VAT on the Raise fee will be an expense for the agency.
VAT Deficit
What is a VAT deficit?
A VAT deficit arises when a contractor charges VAT, but the client is outside the UK VAT domain and does not pay VAT. This can lead to a negative agency commission.
Why does this happen?
The contractor invoice (including VAT) exceeds the client invoice (which does not include VAT).
The agency must cover this shortfall.
When does this occur?
The contractor is VAT registered, but the client is outside the UK VAT domain and does not pay VAT.
The contractor is VAT registered, but the agency is not VAT registered and cannot reclaim VAT.
Can VAT deficits be recovered?
If the agency is VAT registered, VAT paid to the contractor can be reclaimed from HMRC.
If the agency is not VAT registered, VAT is an additional expense.
Any VAT refunds from HMRC can help recover margin losses from VAT deficits.
VAT Deficit FAQ's
What causes a VAT deficit?
VAT is paid to the contractor, but no VAT is charged to the client.
Clients outside the UK VAT domain or VAT-exempt clients do not pay VAT.
VAT is added to contractor invoices due to their VAT-registered Limited Company or Umbrella Company status.
Why is a VAT deficit a problem?
Client payments, after deducting Raise fees, may not cover contractor payments.
Agencies may need to cover the shortfall.
What happens if there is a VAT deficit?
Raise will request the agency to cover the VAT shortfall.
How can I recover my money and commission?
When you submit your VAT return (typically quarterly), you can reclaim VAT where you have paid more than you have charged.
When will I receive a VAT refund?
You owe VAT to HMRC on VAT charged to customers.
You can reclaim VAT paid on business expenses, including contractor VAT.
If VAT paid exceeds VAT received, HMRC will issue a refund.
VAT Registration and Pending Status
When to register for VAT?
You must register if:
Your total taxable turnover for the last 12 months exceeds £90,000.
You expect your turnover to exceed £90,000 in the next 30 days.
You are a non-UK business supplying goods or services to the UK.
Pending a VAT number?
VAT cannot be charged until an active VAT number is issued.
All invoices will be processed without VAT until the VAT number is granted.
For any questions, contact your Raise RM or email timesheets@raisetech.io
VAT deficit calculator
Use our VAT deficit calculator to assess the financial impact of VAT deficits and understand how to mitigate shortfalls.
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