Reply to: VAT on expenses question

[Craig@Clarity]

I have to disagree here - if the contract stipulates that you can re-charge expenses at cost, then for a VAT registered business on the normal VAT scheme, the "cost" is the net amount, because you reclaim the input VAT from HMRC. So I think its reasonable for the agency to expect a £100 + VAT expense to be recharged to them at £100 + VAT. Nobody loses out in this scenario - the whole transaction is balanced.

The reason why the whole "recharge the gross + VAT" scenario is often discussed on here is because so many of us used to be on the flat-rate scheme so arguably the "cost" was the gross amount in this case, as the input VAT could not be reclaimed. That said, it can still be argued that the flat-rate scheme provides a surplus to cover input VAT indirectly so its still not clear cut.

I think you're blurring the lines between Accounting and Commerciality. You can recharge whatever the amount is and add VAT on top. If the contract says at "cost" then it's at "cost" plus 20% (whatever is interpreted as "at cost"). If the contract says 50% then it's 50%. Bottom line is it is an "expense to be recharged" plus 20% VAT on top! Think in terms of a bigger business than a "one-man band" company. Employee A has to stay over night in a hotel and forks out £100 plus VAT as part of their job. The cost to that employee is £120 out of their back pocket which they claim back from the company they work for. So is the "cost" £120 because the employee had to incur that cost or is it £100 because the company can reclaim £20 back. My interpretation in a commercial world is the cost is £120 (£100 plus VAT).

This is all true except for the last part - charging VAT on top of the gross cost means your expenses are 20% more expensive than if you'd recharged the net amount + VAT. They can pass that charge on to the end client but now its the end client that is paying more (whether or not they care is a different matter).

The last part is STILL true in that there is no financial consequence to the agency.

IMO, any VAT-registered business who is able to re-claim the input VAT should re-charge their expenses at the net amount, but again its down to what was agreed with the agency/client.

This in in line with agency talk about "VAT on top of VAT" which it ain't!

[Lance]

Things do get a bit muddier when some of the original expenses incurred no VAT or reduced VAT. In this scenario the client/agency just needs to accept that even if you recharge the net amount, you need to add 20% VAT, even if the original item was zero rated (except for when its a disbursement, which it almost never is). If they don't understand this, then they should speak to *their* accountants.

^^^^^ This is the precise scenario I have.
The agency have now accepted my invoice as the paperwork, despite self-billing. I was only pushing them on a point of principle though as the difference was <£10 to me. I wouldn't want to cause issues with a £15k invoice for sake of £10.

[malvolio]

At the end of the day the only person who worries about whether or not there is a 20% "surcharge*" on their bill is the first person in the chain who isn't VAT registered. And yes, I know about banks and the like, but they have plenty of opportunities to recover those costs by other means. VAT is added to any service costs regardless of how they are made up, as I and others have said many times.


*It isn't a surcharge anyway, it's a legally defined, enforceable tax all the way up the chain of transactions and has been since 1972 or thereabouts.

[TheCyclingProgrammer]

It still amazes me that agencies still get this one wrong. Your company incurs an expense whether there is any VAT on it or not. Let's say £100 plus VAT = £120
Your contract with the agency says you can "recharge" your expenses 100% to the end client. Therefore on your invoice you have one line that says Consultancy of £X and on the second line you have "Expenses Recharged" of £120. You then apply VAT to the whole lot.

I have to disagree here - if the contract stipulates that you can re-charge expenses at cost, then for a VAT registered business on the normal VAT scheme, the "cost" is the net amount, because you reclaim the input VAT from HMRC. So I think its reasonable for the agency to expect a £100 + VAT expense to be recharged to them at £100 + VAT. Nobody loses out in this scenario - the whole transaction is balanced.

The reason why the whole "recharge the gross + VAT" scenario is often discussed on here is because so many of us used to be on the flat-rate scheme so arguably the "cost" was the gross amount in this case, as the input VAT could not be reclaimed. That said, it can still be argued that the flat-rate scheme provides a surplus to cover input VAT indirectly so its still not clear cut.

It's the expenses recharged that stumps them. In reality, the expenses recharged is just 'a figure'. It can be anything (£50, £100, £1000). Whatever it is, you add VAT on top. What you're not doing in this case (and this is where the agency get confused) is adding VAT on top on VAT. You're adding VAT on top of a figure recharged to the client. If it was a disbursement then you would charge the net amount (£100) and add VAT on top.

To the agency, it makes no difference and there is no financial consequence to them. They receive an invoice for expenses recharged of £120 plus VAT. They in turn invoice the end client £120 plus VAT. So in one hand they pay your company £24 VAT and on the other claim £24 VAT from the end client.

This is all true except for the last part - charging VAT on top of the gross cost means your expenses are 20% more expensive than if you'd recharged the net amount + VAT. They can pass that charge on to the end client but now its the end client that is paying more (whether or not they care is a different matter).

IMO, any VAT-registered business who is able to re-claim the input VAT should re-charge their expenses at the net amount, but again its down to what was agreed with the agency/client.

Things do get a bit muddier when some of the original expenses incurred no VAT or reduced VAT. In this scenario the client/agency just needs to accept that even if you recharge the net amount, you need to add 20% VAT, even if the original item was zero rated (except for when its a disbursement, which it almost never is). If they don't understand this, then they should speak to *their* accountants.

[TheCyclingProgrammer]

Every single time this comes up there is a very simple answer:

What you charge the agency for your expenses is between you and the agency - it can be *anything* - but whatever you charge them will attract VAT at the standard rate as its part of your service. You're not invoicing them for food, you're invoicing them for the costs incurred as part of your service.

Negotiate with the agency on what they expect to be charged *net* of VAT but if they insist on you only charging 5% VAT on some elements then they are idiots and should speak to their accountant.

[LondonManc]

Always keep in mind the HMRC logic on expenses - if you make a profit out of it, you're doing something wrong, and probably illegal.

But then again there are no rules about what you charge your client, above or even below the actual cost...

Admin fees involved in incurring the expense - this company secretary is bloody expensive and even more expensive if she gets the boot (i.e. divorce!)

[Lance]

Always keep in mind the HMRC logic on expenses - if you make a profit out of it, you're doing something wrong, and probably illegal.

But then again there are no rules about what you charge your client, above or even below the actual cost...

it's profit for my company not me personally. I only claim from my company costs that I have genuinely incurred.

[ladymuck]

Always keep in mind the HMRC logic on expenses - if you make a profit out of it, you're doing something wrong, and probably illegal.

But then again there are no rules about what you charge your client, above or even below the actual cost...

Back in my permie days, a company I worked for used to do conference organisation and block hotel bookings, etc. They would negotiate a bulk booking rate for a number of rooms for so many days and get the hotel to issue two invoices - the first would be paid, the second would be sent to the paying client to support the invoicing.

There's nothing wrong with a markup on expenses (how else would any company turn a profit) but I always felt this 'double invoicing' malarkey to be a bit suss. It seems clients didn't like seeing a more transparent, "this is what we paid and this is our markup" view of the costs.

[malvolio]

Yeah I know, but the work is more valuable than a few quid in expenses.

Best one I had was charging for 2 premium economy flights (based on a quote from BA) at £6,000 when they cost me some Avios and £1,500

Always keep in mind the HMRC logic on expenses - if you make a profit out of it, you're doing something wrong, and probably illegal.

But then again there are no rules about what you charge your client, above or even below the actual cost...

[Lance]

You're missing a trick there!

I used to charge one client £1 a mile +VAT for mileage. 45p per mile is what I then paid myself via expenses in order to be within the rules

Yeah I know, but the work is more valuable than a few quid in expenses.

Best one I had was charging for 2 premium economy flights (based on a quote from BA) at £6,000 when they cost me some Avios and £1,500

[Fred Bloggs]

I similarly had an argument with an agency over a disbursement and the VAT on that. I had to send them links to the HMRC manual before they believed me that I'd done it right.

The agency should not be using your receipts to reclaim VAT, they use your invoice for that. The only reason you supply receipts is to prove that the expenditure charged (per Craig's example) is correct and you're not stiffing them. Your company reclaims the VAT on the receipts as that's the VAT it's incurred.

Spot on. I had a massive falling out once with Fircroft over this. I did exactly what you did regarding HMRC guidance. I even went to the trouble of marking up the HMRC guidance with the exact scenario quoted by HMRC guidance substituting my name and company name into the guide note. They refused to accept the client signed off expense claim document, demanding my receipts which are obviously nothing to do with them. Nope, wouldn't pay. In the end it was a bad debt for my company. I never worked through them again.

[ladymuck]

Indeed.

They don't like my invoices as they do self-billing. But I sent them a copy invoice and suggested they use that to get their admin correct. So far they seem happy.
Oddly they don't bat an eyelid at 20% VAT on 45p per mile.

You're missing a trick there!

I used to charge one client £1 a mile +VAT for mileage. 45p per mile is what I then paid myself via expenses in order to be within the rules

[Lance]

I similarly had an argument with an agency over a disbursement and the VAT on that. I had to send them links to the HMRC manual before they believed me that I'd done it right.

The agency should not be using your receipts to reclaim VAT, they use your invoice for that. The only reason you supply receipts is to prove that the expenditure charged (per Craig's example) is correct and you're not stiffing them. Your company reclaims the VAT on the receipts as that's the VAT it's incurred.

Indeed.

They don't like my invoices as they do self-billing. But I sent them a copy invoice and suggested they use that to get their admin correct. So far they seem happy.
Oddly they don't bat an eyelid at 20% VAT on 45p per mile.

[ladymuck]

I similarly had an argument with an agency over a disbursement and the VAT on that. I had to send them links to the HMRC manual before they believed me that I'd done it right.

The agency should not be using your receipts to reclaim VAT, they use your invoice for that. The only reason you supply receipts is to prove that the expenditure charged (per Craig's example) is correct and you're not stiffing them. Your company reclaims the VAT on the receipts as that's the VAT it's incurred.

[Lance]

It still amazes me that agencies still get this one wrong. Your company incurs an expense whether there is any VAT on it or not. Let's say £100 plus VAT = £120
Your contract with the agency says you can "recharge" your expenses 100% to the end client. Therefore on your invoice you have one line that says Consultancy of £X and on the second line you have "Expenses Recharged" of £120. You then apply VAT to the whole lot.

It's the expenses recharged that stumps them. In reality, the expenses recharged is just 'a figure'. It can be anything (£50, £100, £1000). Whatever it is, you add VAT on top. What you're not doing in this case (and this is where the agency get confused) is adding VAT on top on VAT. You're adding VAT on top of a figure recharged to the client. If it was a disbursement then you would charge the net amount (£100) and add VAT on top.

To the agency, it makes no difference and there is no financial consequence to them. They receive an invoice for expenses recharged of £120 plus VAT. They in turn invoice the end client £120 plus VAT. So in one hand they pay your company £24 VAT and on the other claim £24 VAT from the end client.

I had this battle a few years ago with a train ticket. They were adamant I cannot charge VAT for that on the basis that trains are VAT exempt. In the end they asked their accounts department who confirmed that I have to charge 20% VAT on an expense and the only time I don't is if it is a disbursement (for which there are clear rules and travel expenses are not part of those rules).