Agency refusing to pay VAT on travel expenses submitted.

[Fred Bloggs]

Let's say I have incurred a £1000 of travel costs on behalf of the client. The agency insists on reimbursing the expenses through the Ltd Co via an invoice rather than directly to me as a personal expense. Some of the cost is taxi and air fares (no VAT) and some of the cost is hotels (VAT included). I have submitted an invoice for £1000 plus VAT, £1200 in total. Agency is refusing to pay the VAT I am charging because they say "there is no VAT on Taxis and Flights and we are not paying VAT on the hotel bill because it already has VAT on it". My Ltd Co cannot recover the hotel VAT element becasue I am on the flat rate VAT scheme. Therefore any income to my company I have to pay 14.5% VAT on. So I have added the 20% VAT to my invoice, if I don't add the VAT or if the agency doesn't pay it, then I end up paying the VAT out of my profit. the unpaid VATwould be on my books as a bad debt. The agency can't be right?

[TheCyclingProgrammer]

The agency are wrong; you aren't claiming expenses from them, you are billing them for your services which in this case includes your expense costs. The cost of your service attracts VAT.

It depends on what they've agreed with you contractually but if they've agreed to reimburse your expenses in full by means of invoice then that is what they should pay - you invoice them for your expenses in full (including any original VAT where applicable) and add VAT.

The fact that taxis and flights do not attract VAT is totally irrelevant. You aren't invoicing them for a flight or a taxi, you are invoicing them for your service.

I'd try and explain this to them and if they still aren't having it, invoice them in full with VAT and report them to the VAT man if they don't pay the VAT on your invoice.

Why so many agencies don't seem to get this is beyond me. They will reclaim the VAT anyway.

You might want to point them towards this HMRC guide:
http://www.hmrc.gov.uk/vat/managing/...bursements.htm

As you can see, the only exception to the above is in the case of disbursements for VAT purposes (these would typically be large purchases that you've made on behalf of your client and where they become the owner of the goods). Clearly, travel expenses are not disbursements (they are services paid for you and used by you, which your client (the agency) has agreed to reimburse). The above link makes this quite clear.

Key quotes:

There are many incidental costs that your business might incur that you can't exclude from the VAT calculation when you invoice your customers. These could include travelling expenses and your own postage costs. They aren't treated as disbursements for VAT purposes.

It's up to you whether or not you itemise costs like these on your invoices. If you do show them separately when you invoice your customers then they're known as 'recharges', and not disbursements, for VAT. You'll have to charge VAT on them whether you paid any VAT or not.
Some examples of costs that could be recharges but are not disbursements include:
An airline ticket that you buy to visit a client or to travel to a job. If you recharge the cost to your client you must charge VAT because the flight was for you, not for the client.
Postage costs you incur when you send letters to your customers. These are normal business costs and you must add VAT if you recharge them.
A bank transfer fee you might incur when transferring money from your business account to a client's own account. Even though the bank's fee is exempt from VAT, if you recharge the fee you must charge VAT. This is because it was for a service provided to your business and not to your customer.

[Fred Bloggs]

Thanks, your description is exactly how I have explained it.

[TheCyclingProgrammer]

Thanks, your description is exactly how I have explained it.

This has come up on here a few times before. This is what I had to say about it then:

http://forums.contractoruk.com/accou...ml#post1082092

[Fred Bloggs]

This has come up on here a few times before. This is what I had to say about it then:

http://forums.contractoruk.com/accou...ml#post1082092

Thanks, I have pdf'd the HMRC page, higlighted the bit about invoicing recharges, flights etc.. And I will ping it to the agency in the morning.

That's a great help.