Dear Contractor Doctor
I have been contracting through my own contractor limited company for just over two years, and I am now seeking to expand. This has included actively taking on web development and SEO work for clients, which I will be invoicing for through my limited company.
I am looking to engage with an Indian supplier to help with completing development tasks. I have agreed a project cost and/or hourly rate depending on the task. But what I am less sure about is how I record the transaction. Is it like paying another contractor? Am I liable to pay any tax or VAT for this transaction? Is there any implication if I pay the company via PayPal, or should I transfer payment to them via my international bank account?
How do I account for overseas subcontractors?
Contractor Doctor says:
The principles of engaging an overseas subcontractor are broadly the same for a limited company contractor as hiring a contractor or services firm in the UK. The supplier completes the work, sends an invoice and the contractor pays the invoice.
In the same way that invoicing and payments to suppliers in the UK require a compliant ‘paper trail’, so do invoicing and payments to an overseas supplier. And payment using PayPal is perfectly legitimate as long as records are kept.
Invoices from overseas suppliers
Contractors should ensure their overseas supplier provides invoices that include the correct information. This is because, if the contractor’s limited company will be claiming corporation tax relief as a result of paying the supplier, HMRC will want confirmation that the transaction is legitimate and that the expenses are incurred for business purposes.
So, what’s required? The suppliers invoice should be addressed to the contractor’s limited company by name, and not to the contractor. It should include a breakdown of the services or products provided, and these should be detailed enough to enable an HMRC inspector to determine that the services are for business purposes, and not in any excluded categories such as entertainment.
Payments to overseas suppliers
Contractors can pay overseas suppliers via a bank transfer, PayPal or even in cash, although securing a receipt for cash payments is required to both confirm payment has been made and to identify the invoice being settled.
The principles of engaging an overseas subcontractor are broadly the same for a limited company contractor as hiring a contractor or services firm in the UK
As long as bank or PayPal transactions have a reference that tallies with the designation of the supplier and invoice being paid in the contractor’s accounting system, then there should be no problem demonstrating that the payment was to the overseas supplier who was providing goods or services for business purposes.
VAT and local sales tax
Most suppliers from outside of the UK, including India, would not include VAT or local sales tax on their invoice. So, the contractor would only pay the amount invoiced for the products and services supplied, without tax.
In theory, overseas suppliers in the European Union should not charge VAT to a VAT-registered contractor limited company in the UK. Companies within the EU typically don’t charge each other VAT, except for some classes of businesses, such as financial services firms, of if there is a public sector organisation involved.
However, if the EU-based supplier does charge VAT, then HMRC provides guidance on the circumstances under which the contractor can reclaim the VAT directly via the Refund Scheme.