The Ins and Outs of VAT
Architect Matt McKenna highlights key VAT matters in his design practice, Dress for the Weather.
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Architect Matt McKenna highlights key VAT matters in his design practice, Dress for the Weather.
Our first dealing with VAT was when we started up, as our first client was Strathclyde University. We were in a funny position, because we VAT registered to work with them but then we started to pick up smaller jobs. And it was our smaller clients that started asking us about VAT. Why do I need to pay VAT? Why are you VAT registered?
In that very first instance we didn’t know much about VAT if I am being completely honest. But we knew we had to be VAT registered. So we entered it, not blind, but maybe not fully aware of the implications.
Although we were nudged into registration, I think it worked out fine for us and everyone understands. We’ve never really lost a job because we’ve been registered. We're able to justify the value and explain we've passed the VAT threshold. It is also about being a safe pair of hands. We do a lot of project management for public bodies. It suits them to work with us because they know we meet all the requirements in terms of VAT and can sub-contract smaller companies or artists within that structure. It is to their advantage to have us in that middle man role sometimes.
The advantage of our being VAT registered is, as well as charging VAT to clients, we can claim it back from suppliers. This has been particularly useful on our public art projects as we often sub-contract the fabrication – which works out as a large chunk of the overall budget. Not being VAT registered in this scenario would effectively mean we were losing money.
When it comes to VAT, you need to consider where you are in the supply chain. The way we look at it is everyone pays VAT all the way down the chain. If you are the one at the end of the chain that’s not VAT registered then you are the one that eventually foots the bill. Usually, in our experience this has been individual homeowners or clients paying the tax. All the way back up the rest of the chain it evens itself out, because if you are registered you are claiming back that tax. Think about who is beneath you in that chain and what it is they’ll be doing with the VAT. On bigger projects, you’ll know yourself, what the chain of people, organisations and partners is like. You need to be aware of your place in the chain.
We calculate our fees and add VAT on top. It’s always VAT on top. We always detail VAT as a separate line on our invoices. As separate as possible.
VAT returns are self-assessed so you are required to provide HMRC with all the information they require. Our accountant has offered to do our VAT returns for a fee. However, we’re still at a point where it’s fine for us to do it. We’ve got the time to do it and, fortunately, because we are a service business we don’t have that many transactions. If it were thousands of transactions, for example if we were selling products, then it would take us too long and maybe software would be best. My attitude is you might as well do it. For us, it’s a good process to go through every quarter and see how much we are spending and what our turnover is. Rather than just sending everything over to the accountant it gives us the opportunity to just see how things are at that point in time.
Before we are appointed to projects by clients, a lot of our discussions are about making sure everyone understands we are VAT registered, what this means and that VAT will come into play at some point. It is never something that’s been a problem for us but some organisations still need to check with their finance department to confirm their own VAT arrangements. Dealing with this as soon as possible helps remove any awkward moments down the line.
We’ve just been appointed for a project in Norway which isn’t in the EU but is in the European Economic Area. We can’t charge our client VAT but we have a big supplier that is going to be charging us VAT. We have been through a big discussion with HMRC about what we should be doing. We asked whether we should up our fee to incorporate the difference of not charging VAT. But because, unfortunately, that doesn’t balance the system it’s not an option. It was over the process of four or five conversations that we managed to get to the bottom of what it was we needed to do. So, we’ve had to look at how we structure invoicing our client versus the sub-contractor as they will be charging us 20% on top of what we are getting in terms of their fee. If we get the invoicing schedule right alongside our VAT return stagger we can manage the gap between getting charged more money than we are taking in until we can claim the VAT back.
So although it is probably not going to work out as perfectly as we'd hoped, it's again about getting everything sorted early on. And being able to structure the project whereby we are never going to be at a loss financially.
This information was presented by Matt in March 2015, at CEO's Approaching VAT event hosted by Angela Bedi.