Reply to: Expenses and the FRS

[malvolio]

yey!

Well agreed, for FRS people - you're netting £3.60 per £100 invoiced for something you've bought that contains a VAT element already. Might buy a decent bottle of whisky by the end of the year!

But for non-FRSers, work the VAT numbers thorugh the whole supply chain and you'll find the net VAT paid is actually the same either way whether or not you put VAT on VAT or not - it just gets handed back to the Vatman by different people.

[blacjac]

yey!

[Silvertop]

I haven't misinterpreted it - I put in my latest invoices and was told again that I couldn't put VAT on VAT. I told them I was charging VAT on expenses which have been incurred in the process of providing a value added service and quoted section 25.1 of the VAT guide, and now the accounts department has backed down. Result.

[Silvertop]

Someone just sent me an excerpt from the VAT guide - section 25.1 talks about the definition of disbursements for VAT purposes.

For these sorts of expenses which are incurred during the course of providing a service, the guide says they must be included in the value of those supplies when VAT is calculated, so it looks as though the guide bears me out (unless I'm misinterpreting it).

[blacjac]

But you're not. Sending the invoice without VAT would be naughty, but as long as the invoice has VAT it doesn't matter how you came to the net value.

Ahh, I see your argument. Still charge VAT on top of whatever you add for expenses, but just add less (the nett of VAT amount) for the expenses.
Yes that would work .

[VectraMan]

However if my account has told me I must be charging VAT on top, then I will charge VAT on top. As the old saying goes, dont f**k around with the VAT or the VAT man will f**k around with you!

But you're not. Sending the invoice without VAT would be naughty, but as long as the invoice has VAT it doesn't matter how you came to the net value.

[blacjac]

<snip> it might be better not to argue and accept the small loss rather than be seen to be trying it on.

I agree with the sentiment that it is sometimes better to make a loss in order to further the business relationship. However if my account has told me I must be charging VAT on top, then I will charge VAT on top. As the old saying goes, dont f**k around with the VAT or the VAT man will f**k around with you!


If it did ever become an issue for me (it never as yet and I have been recharging expenses to customers for years), then I would give them a discount on the invoice total rather than be seen to be not charging VAT on one element of it.

[blacjac]

Hi Blacjac

That is correct. You certainly have to charge your client VAT on your expenses if your underlying services are VATable. The question is, if I incur a hotel expense of £100 + VAT, should I recharge my client £100 + VAT = £117.50 or (£100 + VAT) + VAT = £138.06?

PUMA

That is a verry similar question to the one I asked my accountant.

His answer would be (Exp + VAT) + VAT, so in your example £138.06.

His reasoning being, you are not actually claiming the expense off them, you are adding £117.50 to your invoice to cover your costs, so VAT goes on top.

What would your advice be if I had asked you that question?

[VectraMan]

That is correct. You certainly have to charge your client VAT on your expenses if your underlying services are VATable. The question is, if I incur a hotel expense of £100 + VAT, should I recharge my client £100 + VAT = £117.50 or (£100 + VAT) + VAT = £138.06?

I think the key thing here is that reimbursing expenses is a private arrangement between yourco and the client. There's no reason why you couldn't have a deal where they only reimbursed 50%, or if they didn't require receipts you could get away with charging them double. It's not an accounting issue, it's a customer relations issue, and as Mr. The Puma says, it might be better not to argue and accept the small loss rather than be seen to be trying it on.

[Silvertop]

There seem to be a bias towards presenting these expenses to my client as an additional charge rather than a simple business expense and I will approach them with this argument.

I appreciate the 2 perspectives which are the horns of this particular dilemma, and if they really dig their heels in then for the sake of goodwill I'll give it up, however in addition to the tack above I'll claim precedence because they've been OK about it for the past 18 months.

In mitigation of the 2nd perspective though, isn't the reduced amount I pay to HMCE paid for by the reduction in paperwork that they have to process every quarter? This is an "arrangement" between me and HMCE and doesn't really belong in any argument from the client which is based on whether I'm advantaged or disadvantaged by being on the FRS.

Thanks for the replies.

[THEPUMA]

Don't mean to be disprespectful THEPUMA as I know you are an accountant.

However my accountant has told me that you are not claiming expenses from the client, you can ONLY do that from your employer.

The fact that your employer has an agreement to recharge expenses to the client means that that recharge becomes a sale of services and is subject to VAT.

Hi Blacjac

That is correct. You certainly have to charge your client VAT on your expenses if your underlying services are VATable. The question is, if I incur a hotel expense of £100 + VAT, should I recharge my client £100 + VAT = £117.50 or (£100 + VAT) + VAT = £138.06?

PUMA

[blacjac]

Don't mean to be disprespectful THEPUMA as I know you are an accountant.

However my accountant has told me that you are not claiming expenses from the client, you can ONLY do that from your employer.

The fact that your employer has an agreement to recharge expenses to the client means that that recharge becomes a sale of services and is subject to VAT.

[THEPUMA]

This is actually a complex anomaly which I think very few people on the FRS understand.

I think there are 2 perspectives on it. The first is that you shouldn't be financially disadvantaged because you incur expenses on behalf of your client, in which case you should charge VAT on VAT.

The second is that you normally benefit financially from being on the FRS so why should your client be financially disadvantaged because you have chosen to be on it. Therefore you charge VAT once only and accept that whenever you incur an expense, the profit on the flat rate scheme is reduced.

I have explained this to clients on a number of occasions and in the overwhelming majority of cases, they have decided that the goodwill with their client is more important than a modest VAT loss and therefore only charge VAT once.

Sometimes you have no option if the agency/client have a policy on the matter, which seems to be the case in this instance.

[VectraMan]

WTS - but it is a sale, it's part of the money you charge your client for your service. So you have to add VAT onto whatever you charge.

You might lose out by being on the FRS, but that's the gamble you take with the FRS: that the amount you lose by not being able to reclaim VAT is outweighed by the amount you gain. It shouldn't affect the way you charge the client.

[blacjac]

It can be a bit difficult to explain to some accounts departments.....

You are not actually claiming any expenses from your client, you are charging them extra for your services, to cover the cost of any expenses you have inurred.
And as you are charging them extra, this charge must be plus VAT under law.