VAT on charging expenses back to your client

[Contreras]

BUT, in reality, if your client or agency only lets you re-charge at net cost, you still aren't losing out because the whole point of the flat-rate scheme is that the surplus amount covers any input VAT over the course of the year.

Amazing how many people seem to overlook this. And not just over the course of the year but probably over the course of a contract, unless you are billing more in expenses than hours.

Also: To be "fair" you would need to re-charge at somewhere between net & gross, otherwise you could stand to make a profit on those expenses.

It's a question that pops up every so often but the "out of pocket" rationale smacks of permie logic, where really it should be viewed as a matter of variable profit margin and managed accordingly.

[TheCyclingProgrammer]

Of course

I thought it was worth repeating as I'm sure people still forget/aren't aware that the flat-rate surplus is first and foremost intended to cover your input VAT costs, with any profit over and above this a bonus.

[ContrataxLtd]

Although:

1. You're still £102.60 better off than if you're client wasn't willing to reimburse your expenses at all (not all clients do). Recovering any of the cost is better than nothing.

2. If on the same invoice as your £100 expense re-charge, you've also charged them for say, £10k + VAT for your services, then you've just made £260 in surplus VAT after taking off the flat-rate amount (using 14.5%), which more than covers that extra £17.40 of VAT you weren't able to recover from directly the client or HMRC, still leaving you with a tidy profit of £242.60 subject to CT for being on the FRS.

Of course

[TheCyclingProgrammer]

If you recharge them £100+VAT the net cost to them is only £100 thus they have saved £20, however, you only receive income of £102.60 and thus have lost out by £17.40, although you will save corporation tax on this amount.

Although:

1. You're still £102.60 better off than if you're client wasn't willing to reimburse your expenses at all (not all clients do). Recovering any of the cost is better than nothing.

2. If on the same invoice as your £100 expense re-charge, you've also charged them for say, £10k + VAT for your services, then you've just made £260 in surplus VAT after taking off the flat-rate amount (using 14.5%), which more than covers that extra £17.40 of VAT you weren't able to recover from directly the client or HMRC, still leaving you with a tidy profit of £242.60 subject to CT for being on the FRS.

[TheCyclingProgrammer]

Specifically this sentence "Also, whether you itemise core expenses separately or not, be careful that the values that appear on the invoice are net of VAT – otherwise, when you come to add VAT to the combined subtotal of services and expenses, your client may find that they are being charged VAT a second time on these items. "

It is my understanding that the expenses you re-charge to your client must be VAT inclusive. It is correct to charge VAT on top of the VAT you have already paid otherwise the contractor will lose out.

The only rule is that you must charge VAT on your expenses (re-charges). Whether this is on the original net cost (so it works out the same) or on the gross price is nothing to do with HMRC and is between you and your client. It doesn't even have to be the net or gross cost...it could be anything - a flat rate per day, a fixed rate per mile, the net cost, the gross cost etc. Whatever it is, you add VAT on top and that's it. The original cost may not have even had a VAT element (e.g. exempt) but you still add VAT when you re-charge it.

Disbursements, where you've bought something on your clients behalf but it is for them (e.g. a web hosting package, a domain name), are handled slightly differently - you can show the net cost and VAT element separately - you do not need to add any more VAT to this as you've effectively just acted as an agent for the client.

If you're on the standard VAT scheme, it really makes no difference. You pay £120 including VAT reclaim the £20 on your VAT return and re-charge the net cost to the client, so £100 + VAT.

If you're on the flat rate scheme, you can't reclaim the VAT so the total cost to you is the gross amount, so it would be better if you re-charged the gross amount, so £120 + VAT, or you'll be slightly out pocket as you will need to hand over your flat rate VAT to HMRC on whatever you re-bill. BUT, in reality, if your client or agency only lets you re-charge at net cost, you still aren't losing out because the whole point of the flat-rate scheme is that the surplus amount covers any input VAT over the course of the year. So in the above example, you'd have paid £120, re-charged the client £100 + VAT, and paid over say, £17.40 if your FRS percentage is 14.5%. So you've only recovered £102.60 of your cost from the client but over the course of year, the additional VAT you make on your sales should more than recoup the missing £17.40. In fact, if you're input VAT exceeds the amount you make from the FRS, you shouldn't be on it. And you're still in a much better position than the person whose client won't reimburse any of their expenses at all.

I can understand why some clients/agents don't like people re-charging the gross amount and then adding VAT on top. From their point of view you should be recovering the VAT element of your expense from HMRC, not from them, but of course if you're on the FRS you can't. But that's not their problem is it?

Oh, and if you use the search function, this has been discussed on here many, many times...

[ContrataxLtd]

I think there may be an error in the advice given on this page:

IT contractor expenses: Charging expenses back to your client :: Contractor UK

Specifically this sentence "Also, whether you itemise core expenses separately or not, be careful that the values that appear on the invoice are net of VAT – otherwise, when you come to add VAT to the combined subtotal of services and expenses, your client may find that they are being charged VAT a second time on these items. "

It is my understanding that the expenses you re-charge to your client must be VAT inclusive. It is correct to charge VAT on top of the VAT you have already paid otherwise the contractor will lose out.

HMRC guidelines state:

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.

Source: https://www.gov.uk/guidance/vat-cost...d-to-customers

This is my take on it but I am not a tax professional so can anyone out there shed any further light on this?

Hi welshrich

I think ultimately this comes down to what your agency/client are willing to reimburse to you which should be detailed in your contract. What ever you do recharge to them needs VAT adding on at 20% as normal as it probably won't class as a disbursement (not many things do).

Some agencies/clients get funny with VAT being charged on top of VAT because it ends up costing them more but the contractor loses out if they are on the Flat Rate Scheme by only recharging the net + VAT. As an example:

You incur a hotel at £100+VAT, the total cost to your company is £120 as the VAT isn't reclaimable on the flat rate scheme (assumed 14.5% for this example).

If you recharge £120+VAT to your client/agency the net cost to them is £120 and you receive income of £123.12 which after the hotel expense of £120 leaves you with a profit on the transaction of £3.12 subject to corporation tax.

If you recharge them £100+VAT the net cost to them is only £100 thus they have saved £20, however, you only receive income of £102.60 and thus have lost out by £17.40, although you will save corporation tax on this amount.

I hope this highlights why some clients/agencies don't like the whole VAT on VAT idea, it is costing them 20% more! The fact that the contractor loses out, purely because they are on the flat rate scheme, is not a concern of the client/agency.

Hope this helps

Martin
Contratax Ltd

[Louisa@InTouch]

My understanding, is unless it is a disbursement, you can charge the full amount of expenses that you have incurred, including VAT (alongside your services), which is then the net invoice. Then you can charge 20% VAT.

For example, if you stayed at a hotel and the cost was £100 plus VAT, plus your services were £1,000. Your invoice would be for £1,120 + 20% VAT.

If it is a disbursement (paid on your client's behalf), then you would not charge VAT on top of a VAT inclusive price.

However, many agents will refuse to pay VAT on top of VAT. So, you should check the small print in your contract to see if it states they will only pay the net amount of expenses.

[welshrich]

I think there may be an error in the advice given on this page:

IT contractor expenses: Charging expenses back to your client :: Contractor UK

Specifically this sentence "Also, whether you itemise core expenses separately or not, be careful that the values that appear on the invoice are net of VAT – otherwise, when you come to add VAT to the combined subtotal of services and expenses, your client may find that they are being charged VAT a second time on these items. "

It is my understanding that the expenses you re-charge to your client must be VAT inclusive. It is correct to charge VAT on top of the VAT you have already paid otherwise the contractor will lose out.

HMRC guidelines state:

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.

Source: https://www.gov.uk/guidance/vat-cost...d-to-customers

This is my take on it but I am not a tax professional so can anyone out there shed any further light on this?