Reply to: Payment of out of pocket expenses by client

[kal]

Yes. You don't have to pass costs on to the client.

The way I work it.

- Lots of expenses are my companies cost of doing business. E-mail, phones, internet etc.
- Lots of expenses are mine (e.g. Mileage) which is sent to MyCo and paid back to me.

Some are costs that clients ask me to incur for them (e.g. can you go to Germany for 3 days). Those are incurred and passed onto the client. Not on an item level. I just look at the invoices, total them up and come to an arrangement with ClientCo. E.g. a hotel might cost me £140 but I chose to stay in a nice one so I'll bill £100 to Client Co. They never see the hotel receipt as I'm not asking them to pay it. They are just paying a variation on the original billing terms we agreed. The line is written into the standard "services rendered" line

Cheers

[Sockpuppet]

What happens if I just choose to absorb the cost of the expense and not charge it back to the client? At the moment I need to travel to a different office once or twice a month, it works out to an extra 10 pounds for the return train ticket. To be honest I would rather not bother with all the hassle that comes with getting that expense paid by the client as their system is a nightmare to use and there is a lot of red take. Can I just claim that ticket as a normal company expense for CT purposes?

Yes. You don't have to pass costs on to the client.

The way I work it.

- Lots of expenses are my companies cost of doing business. E-mail, phones, internet etc.
- Lots of expenses are mine (e.g. Mileage) which is sent to MyCo and paid back to me.

Some are costs that clients ask me to incur for them (e.g. can you go to Germany for 3 days). Those are incurred and passed onto the client. Not on an item level. I just look at the invoices, total them up and come to an arrangement with ClientCo. E.g. a hotel might cost me £140 but I chose to stay in a nice one so I'll bill £100 to Client Co. They never see the hotel receipt as I'm not asking them to pay it. They are just paying a variation on the original billing terms we agreed. The line is written into the standard "services rendered" line

[kal]

That's how I do it at the moment - client pays for the flight, I pay for the rest. I claim my personal expenses from MyCo, MyCo adds VAT and invoices the client.

In the OPs situation - what happens when the expenses are paid directly out of the company bank account?

What happens if I just choose to absorb the cost of the expense and not charge it back to the client? At the moment I need to travel to a different office once or twice a month, it works out to an extra 10 pounds for the return train ticket. To be honest I would rather not bother with all the hassle that comes with getting that expense paid by the client as their system is a nightmare to use and there is a lot of red take. Can I just claim that ticket as a normal company expense for CT purposes?

[pacontracting]

Except that the entity who charged "VAT on VAT" has made a profit, or markup. But there's nothing wrong with that. Businesses are allowed to make a profit, just as they may make a loss (e.g. if on FRS and passing through only the net cost).

This is true. The VAT evasion part comes into it because if you are receiving payment directly into your personal account as part of a service you are delivering, then yourCo is not collecting the VAT on that payment (i.e. it doesn't go through the companies books) and so yourCo's VAT return for that quarter will be a bit light. Same as a plumber getting cash in hand and not declaring the VAT. Even worse, if you claim expenses directly via your clients expense procedure, your client is actually giving you the gross amount back i.e. including VAT and you are, then, not giving that VAT to the revenue! That's called VAT fraud (even if you didn't know you were doing it).

[Contreras]

Which is effectively what I said a few posts ago...

And VAT on VAT is only a problem where the end of the chain isn't VATable themselves.

It also goes a bit wrong under FRS of course, but under conventional VAT, if you work the numbers all the way through the chain from beginning to end the net result is zero; all the various members of the daisy chain will be reclaiming the various bits of VAT they've been charged.

Except that the entity who charged "VAT on VAT" has made a profit, or markup. But there's nothing wrong with that. Businesses are allowed to make a profit, just as they may make a loss (e.g. if on FRS and passing through only the net cost).

[malvolio]

..snip..

Anyway - got a proper answer from a VAT specialist today
- The contractor is liable for making sure that they charge VAT correctly and raises appropriate VAT invoice.
- Costs such as mileage and rail fares need to have VAT added onto them on the invoice because they are part of the service that the contractor is selling.
- For vatable items such as hotel bills the bill should be invoiced net of VAT, with the VAT added onto the overall invoice (so if bill was £120 inc VAT you'll effectively be invoicing exactly the same amount to client)

Which is effectively what I said a few posts ago...

And VAT on VAT is only a problem where the end of the chain isn't VATable themselves.

It also goes a bit wrong under FRS of course, but under conventional VAT, if you work the numbers all the way through the chain from beginning to end the net result is zero; all the various members of the daisy chain will be reclaiming the various bits of VAT they've been charged.

[Contreras]

Who said anything about excluding VAT? If the expense included VAT (e.g. a hotel), it would be passed onto the client directly. You can't add MyCo VAT on top of VAT already charged by the hotel.

Correct for hotels, but if you wanted to charge the client for mileage or rail fares (exempt) then you should invoice the client for those costs plus VAT.

Not quite true. What you can or cannot recharge is a contract matter between YourCo and the Client. HMRC only care that you add VAT to everything*. If the client will accept paying VAT on top of your already VAT-inclusive hotel bill then so be it.

Anyway - got a proper answer from a VAT specialist today
- The contractor is liable for making sure that they charge VAT correctly and raises appropriate VAT invoice.
- Costs such as mileage and rail fares need to have VAT added onto them on the invoice because they are part of the service that the contractor is selling.
- For vatable items such as hotel bills the bill should be invoiced net of VAT, with the VAT added onto the overall invoice (so if bill was £120 inc VAT you'll effectively be invoicing exactly the same amount to client)

Again this is confusing tax law with the contractual arrangements. HMRC only care that you add VAT to everything*. There's nothing to say that you must pass on the original costs precisely, or that you can't add an 'admin' fee, or even re-charge at a discount.

* "Everything" being stuff that you have consumed during the course of business. That does not include stuff which you have bought for and on behalf of the client, e.g. if you paid a rail fare for one of the client's employees.

[Contreras]

Dunno whether HMRC would agree with me, but in my simple world I'm happy for clientCo to book and pay for a plane ticket / hotel directly for myCo's representative (me), but if I'm 'on expenses' then they get reimbursed via myCo and invoiced back to client (with VAT).

That's how I do it at the moment - client pays for the flight, I pay for the rest. I claim my personal expenses from MyCo, MyCo adds VAT and invoices the client.

That's fine but note also that all travel/accom. expenses need to be put on the P11D regardless of who paid for it.

[SarahL2012]

In the OPs situation - what happens when the expenses are paid directly out of the company bank account?

Funnily enough I raised that with BigCo earlier today as well - trying to find out whether they had the Contractor as an individual on their system or Contractor Company. Its the individuals they've set up, so guessing those contractors must pay for everything out of personal accounts.

[SarahL2012]

Who said anything about excluding VAT? If the expense included VAT (e.g. a hotel), it would be passed onto the client directly. You can't add MyCo VAT on top of VAT already charged by the hotel.

Correct for hotels, but if you wanted to charge the client for mileage or rail fares (exempt) then you should invoice the client for those costs plus VAT.

If you put those costs through their Expenses system then you would be refunded for them without the VAT - which means you have undercharged.

So if your rail fare was £100 then you have incurred a cost of £100 plus £0 VAT. When you invoice the client you need to charge them £100 plus 20% VAT = £120. If they can fully recover the VAT then they won't care, but most financial services companies can't & I think that's why they started asking contractors to use their internal systems.

Anyway - got a proper answer from a VAT specialist today
- The contractor is liable for making sure that they charge VAT correctly and raises appropriate VAT invoice.
- Costs such as mileage and rail fares need to have VAT added onto them on the invoice because they are part of the service that the contractor is selling.
- For vatable items such as hotel bills the bill should be invoiced net of VAT, with the VAT added onto the overall invoice (so if bill was £120 inc VAT you'll effectively be invoicing exactly the same amount to client)

[TheFaQQer]

Dunno whether HMRC would agree with me, but in my simple world I'm happy for clientCo to book and pay for a plane ticket / hotel directly for myCo's representative (me), but if I'm 'on expenses' then they get reimbursed via myCo and invoiced back to client (with VAT). Don't know how far I'd argue the toss in OPs situation, but it doesn't sound right.

That's how I do it at the moment - client pays for the flight, I pay for the rest. I claim my personal expenses from MyCo, MyCo adds VAT and invoices the client.

In the OPs situation - what happens when the expenses are paid directly out of the company bank account?

[mudskipper]

Dunno whether HMRC would agree with me, but in my simple world I'm happy for clientCo to book and pay for a plane ticket / hotel directly for myCo's representative (me), but if I'm 'on expenses' then they get reimbursed via myCo and invoiced back to client (with VAT). Don't know how far I'd argue the toss in OPs situation, but it doesn't sound right.

[malvolio]

Who said anything about excluding VAT? If the expense included VAT (e.g. a hotel), it would be passed onto the client directly. You can't add MyCo VAT on top of VAT already charged by the hotel.

Yes you can. Arguably you should since it is a cost of YourCo providing your services, which is the core principle of how VAT works. However if you choose to reduce your chargebale costs to offset the VAT element, that's up to you. It is cost neutral anyway, unless your end client is not able to recover the VAT.

However we are talking about money paid out from your own pocket. How you get it back and from whom isn't really that relevant, as long as you get it back.

[Project Monkey]

I checked on the website last night. Its wrong because HMRC has a whole section on what costs can be passed onto clients without VAT (disbursements) and what needs to be invoiced in the normal commercial manner.

"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."

HM Revenue & Customs: Costs passed on to clients - disbursements - and VAT

Who said anything about excluding VAT? If the expense included VAT (e.g. a hotel), it would be passed onto the client directly. You can't add MyCo VAT on top of VAT already charged by the hotel.

[SarahL2012]

What's wrong with the client reimbursing the worker directly for their expenses? Lots of clients do it like this. Keeps it simple too because the expenses don't have to go through your LTD

I checked on the website last night. Its wrong because HMRC has a whole section on what costs can be passed onto clients without VAT (disbursements) and what needs to be invoiced in the normal commercial manner.

"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."

HM Revenue & Customs: Costs passed on to clients - disbursements - and VAT