Q. There are many posts regarding IR35 and substitution, but no details on how to pay substitute from my limited company. Within my current contract I have the right to provide a substitute, I cannot fulfil the contract without a substitute and have now found a substitute to complete the work who is acceptable to the client.
A1. The substitute should raise a sales invoice detailing the work done & the period this covered. Your company will then pay this & enter the expense as a ‘sub-contract’ payment in its own accounting records. There is nothing else that needs to be done.
A2. The recent IR35 changes have had no fundamental impact on how VAT is applied to supplies to public bodies; your supply to your customer remains subject to VAT in the normal way and any VAT incurred on costs to your business remains recoverable, subject to any restriction applicable to the way in which you account for VAT.
Therefore, had you been making supplies without having to engage a substitute then there would be no material impact to you financially, even though you are using the Flat Rate Scheme (FRS).
However, if you are having to engage a substitute and that substitute is VAT registered, they will be charging VAT to you that, under FRS, you will not be able to recover and that VAT will be a material cost to you.
Whether or not it would be more beneficial for you to leave FRS really depends upon the figures:
remaining in FRS will mean additional costs related to charges made by any VAT registered substitutes but you will continue to benefit from the reduced percentage of VAT declared on sale; or
exiting FRS will mean VAT incurred on costs for your business, including that charged by VAT registered substitutes, will be recoverable subject to the normal rules governing VAT recovery but this will need to be off-set against the fact that VAT will have to be declared at 20% on sales.
For that reason we are in no position to advise on whether to stay or leave FRS but hopefully the above will have provided sufficient advice for you to be able to make that decision.