If you are planning on recharging expenses to your clients it’s crucial you do so consistently and correctly. This helps with presenting yourself professionally to your customers, but also ensures you’re compliant in charging VAT where appropriate.
Expenses and Disbursements
Costs you may wish to recharge to your clients fall into two categories – expenses and disbursements – which are dealt with differently. You must know the difference in order to determine which costs to recharge with VAT.
A disbursement is a cost to your business that is purchased for the use of the client. For example;
– a solicitor paying court fees for a client
– an accountant paying filing fees to Companies House on behalf of a client
– a web designer purchasing a domain name on behalf of a client
As it’s the customer who receives the benefit of these goods or services, you simply act on their behalf when purchasing them, you need not add VAT when recharging the cost to your client.
This can be of benefit if the supplier did not charge VAT or if your client is unable to reclaim VAT.
Remember though, if you exclude disbursements from your VAT calculations it’s necessary to list them separately on your invoices.
Expenses are costs that relate to you, such as your travel expenses or business phone calls. As HMRC sees these costs as a supply to your own business, you should always add VAT when you recharge these expenses to a client.
You must add the standard VAT rate of 20% to all recharged expenses – even if the item itself is Exempt or Zero Rated (such as a postage stamp or rail ticket)
Should I recharge all my expenses?
Well, it’s up to you. We think its good business sense to allow some leeway – for example we’ll often absorb travel costs when visiting a local client. We also don’t recharge bank transfer fees or phone bills.
However, what works for one business may not work for another – the salient thing is to ensure you’re consistent with your recharge. Write up a brief process with what you plan to recharge clients and stick with it.
If you need further advice on recharging expenses and disbursements check out HMRC’s guide here.