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Should I charge VAT on expenses recharged to my client?

A common question we are asked is whether or not we should charge VAT on expenses recharged to clients. In this article, we will look at when you should or should not charge VAT to your client.

The simple answer is that if you are selling a standard rated product or service and you incurred expenses doing that – then you must charge VAT on the expenses that you are charging to your client. If you incurred a cost on behalf of your client, that you need to pass over to them – then is a disbursement. You pass the gross cost over to your client without charging VAT.

Let’s look at this in more detail.

Incidental Costs

Sometimes you will incur incidental costs during the delivery of a service or a product to a client that you might want to recharge to the client – such as hotel costs, mileage, taxi fares, train tickets, flights, subsistence or postage. These costs are your costs and they have been incurred by you and consumed in your own business. You have ‘consumed’ the product or service you are buying.

Posting the spend to your accounts:

  • You will post VATable spends net – you can recover any VAT charged on hotel, meal and subsistence costs providing you have the proper VAT invoice or receipt of course. You would recharge that net cost to your client.
  • Mileage expenses will be posted as costs to your accounts using the advisory fuel rates to recover the VAT element of your mileage claim. It is common practice to recharge mileage at 45p per mile whether you have recovered VAT on your mileage claim or not. You would have to charge VAT on the full mileage cost when you recharge it to your client – ie on the full 45p per mile.
  • Train fares and postage are zero-rated items for VAT so you will not be charged or be able to recover VAT on these spends. You would recharge the full cost to your client.

Recharging Incidental Costs

If you are VAT registered and you are recharging expenses to your clients – then you must charge VAT on all of those expenses – regardless of whether or not you paid VAT on the spend in the first place.

So when you recharge zero-rated expenses to the client – you have to add VAT to your recharge as the expenses are incidental to the main supply which is a standard rated.

Cost To YouRecharge
Cost Net VATGrossNetVatGross
Train Ticket120012012024144
Plane Ticket300030030060360
Hotel1402816814028168
Subsistence2042420424
Mileage – 100 x .454324545954
Total62334657623125748

What if my main supply is zero-rated or exempt?

If your main supply of goods or services is not a standard rated supply, then you would recharge expenses at the same VAT rate. If your main supply is zero-rated or exempt, then your recharge would be zero-rated or exempt.

Disbursements

Sometimes you might buy things on behalf of the client, with the full knowledge and permission of the client – that the client will consume. These are not expenses relating to your business, they relate to your client’s business – these are called disbursements.

To treat a payment as a disbursement all of the following must apply:

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services

In this case, the costs belong to your client and you are acting as the agent.

You will not be able to recover any VAT you may have paid on the iten, because the cost does not belong to your busines.

You can list disbursements at the bottom of your invoice to your client and not charge VAT on them.

If you buy a train ticket for you or your staff to travel to your clients’ office, it’s an expense and you must charge VAT on it when you recharge it to your client. If you are buying a train ticket for your client to travel with you to an event – you can pass the cost on as a disbursement and not charge VAT on it.

Does it matter if a cost is an expense or a disbursement?

If both you and your client are VAT registered, then it makes little difference – you will recover VAT on your spends and charge VAT on the recharge to your customer. Your customer will recover VAT on the purchase.

If your client is not VAT registered and the cost did not have VAT on it, then there is a small advantage to recharging the cost as a disbursement – if the criteria for treating the cost as a disbursement are met.

If your customer is not VAT registered, they will, unfortunately, suffer the additional VAT on the recharge of your expenses.

What should I do if I discover an error in my accounts and I have not been recharging VAT on my expense recharges?

The correct answer is to go back and amend the error. Raise credit notes against invoices raised with the wrong values on and raise new invoices with the correct VAT charged on expenses and ask the clients to pay the difference.

If the client is VAT registered and you have charged VAT inclusive expenses gross, then ultimately – the correction should result in an overall cost reduction – albeit a small one. Although they will pay more VAT to you in the short term, they can recover the VAT paid in their next VAT return.

If the client is not VAT registered, the additional VAT will go straight to their bottom line.

What’s the difference between buying, Hire Purchase, or leasing business-asset


We are often asked what the differences are between buying outright, hire purchase and leasing business assets. So here is a summary of how they work for tax, VAT and what’s shown in the accounts for each method.

The choices will depend on what finance is available, but each method has different treatments for tax, VAT and accounting purposes.

Buy – Outright purchase with cash or a bank loan

How it works for tax
The depreciation charge is not allowable for tax relief but you can claim capital allowances.
100% tax relief may be available up to a maximum of £200,000. This does not apply to cars and the excess over £200,000 gets a lower rate of writing down allowance
Qualifying energy saving or environmentally beneficial equipment gets a 100% tax deduction.Loan interest used for the purchase is tax deductible.

How it works for VAT
If the purchaser is VAT registered, the VAT is claimed back on the VAT shown on the suppliers invoice.VAT can’t normally be claimed on cars.

What the accounts show
The cost of the asset goes on the balance sheet usually as a fixed asset and it is depreciated.


Hire Purchase – The asset usually includes an option to purchase at the end of the term

How it works for tax
This is the same as for an outright purchase.The finance charge is normally an allowable tax deduction.

How it works for VAT
VAT is normally payable with the first installment and claimed back in the normal way.
VAT can’t normally be claimed on cars.

What the accounts show
The asset on HP is shown as if it was purchased i.e. the cost of the asset goes on the balance sheet and it is depreciated.
The hire purchase amount due is shown as a liability on the balance sheet, which is reduced by the HP payments (excluding the interest element).


Operating Leases  – The asset isn’t owned but rented and returned to the owner at the end of the rental period e.g. contract hire

How it works for tax
The tax relief is given for the rental paid, except where the asset is a car with a Co2 emission exceeding 130g/km, where there is a 15% reduction in the tax claimable amount.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.  This restriction does not apply to maintenance charges shown separately on car contract hire.

What the accounts show
The rentals appear on the profit and loss account as an expense.


Finance Lease

How it works for tax
For short term leases tax relief is normally  given for the finance lease payments,  with a 15% disallowance  for cars with Co2 emissions exceeding 130g/km
For long term leases tax relief is given in line with the accounting treatment  and capital allowances claimed.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.

What the accounts show
For short leases (up to 7 years) the rental payments are shown as an expense on the profit and loss account.For longer term leases the asset is shown on the balance sheet and depreciated. 
There is  also a liability shown for the future rental payments.

Please contact us if you want more advice on this topic.

I am a UK VAT registered business: how do I reclaim VAT on expenses incurred in Europe?

How to reclaim VAT on purchases abroad: refunds of VAT in the European Community for EC and non-EC businesses. 

Under the Thirteenth VAT Directive (86/560/EEC) UK businesses visiting other EC countries are able to claim VAT refunds on VAT incurred in those countries.

  • For a UK registered business the application is made online, via HMRC’s VAT services (log in to HMRC/the Government Gateway, go to VAT services and scroll down to see VAT EU refunds).
  • If the business has an agent, the agent is required to obtain authorisation (go online) for their client and then it may access the service.
  • A separate online application is required for each Member State in which a claim is to be made.
  • The refund period must not exceed one calendar year or be less than three calendar months unless the period covered represents the remainder of a calendar year following submission of an application which covers the earlier part of the year.
  • Claims must be made by 30 September following the calendar year that the VAT is charged.
  • Member States have their own special requirements; details can be obtained from the relevant tax authority.

Minimum claim level:

  • €400 euro if a claim covers a period of more than three months but less than a year
  • €50 euro if a claim covers a whole year or the remainder of a year (ie where a claim covers the whole period between the end of a prior claim and the end of the year)

Am I eligible to make a claim?

You can make a claim from an EU country if:

  • You’re not VAT-registered in that EU country and don’t have to be or can’t be registered there
  • You don’t have a place of business or other residence there
  • You don’t make any supplies there, unless
    • They’re transport services for the international carriage of goods
    • The person you’re supplying pays VAT on them

What can I claim?

A business can claim VAT on goods and services purchased during the refund period, and VAT on goods imported into the UK during the refund period.

No claim is allowed for VAT:

  • That has been incorrectly invoiced, or where VAT has been charged on the dispatch of goods to another member state, or the export of goods outside the EU.
  • On the purchase of a motor car
  • On goods and services used for business entertainment. As an exception, VAT on entertainment for overseas customers may be reclaimed but only if it is of a very basic nature.
  • On goods and services used for non-business activities.

Only 50% of the total VAT charged may be claimed on hiring or leasing a motor car.

The nature of the goods and services acquired have to be described according to the following expenditure codes.

1. Fuel.

2. Hiring of means of transport.

3. Expenditure relating to means of transport.

4. Road tolls and road user charge.

5. Travel expenses, such as taxi fares, public transport fares.

6. Accommodation.

7. Food, drink and restaurant services.

8. Admissions to fairs and exhibitions.

9. Expenditure on luxuries, amusements and entertainment.

10 Other.

Many Member States will require sub-codes in addition to the main codes set out above, and where applicable, these sub-codes will appear as completion options on the electronic portal. Where code 10 is used, without an accompanying sub-code, a narrative description of the goods or services must be entered in a free text box, using the language(s) required by the Member State of Refund.

If an invoice includes items covering more than one expenditure code the code relating to the highest proportion of expenditure is the one that should be used.

Currency of EU VAT Refund claims

All invoices entered on EU VAT Refund claims must be expressed in the currency of the Member State of Refund or the claim will be rejected by that Member State. If a claim is to a Member State where the Euro is not the national currency and a business has invoices that are in Euros they must be converted. The exchange rate used should be as on the date of the invoice as provided by the European Central Bank (ECB).

A very short guide to: International VAT

VAT is a tax that is applied in all EU countries. However, each EU country has different rules and regulations governing how it collects VAT. Some non-EU countries have VAT rules which differ from EU VAT rules.If you’re planning to trade internationally, you’ll need to familiarise yourself with the laws of each country you trade with. Most businesses seek professional advice at this stage. However, to get started, here’s an overview of some of the fundamental international EU VAT principles.

Due to the result of the Brexit referendum, it will be necessary to monitor any changes to the UK and EU VAT position when further details on the terms of the UK's exit from the EU are known. In the meantime, our advisors will be able to discuss the possible implications on your business with you.

Trading within the EU

Goods

When you begin buying and selling goods within the EU, there are a few administrative requirements to stay tax compliant. These include:

  • EC sales list – This is a document you need to submit to HMRC with the VAT return which outlines sales to businesses in other EU member states.
  • Intrastat – When the value of dispatches and acquisitions of goods to and from the EU member states breaches certain thresholds, you need to submit an intrastat form monthly. This details the movement of your goods around the EU.

Dispatching goods to an EU member state

If you sell goods to a customer in another EU member state, you are dispatching them.

If the customer is not VAT registered, then UK VAT will be charged just like other sales. This is known as a distance sale; each EU country has a VAT registration threshold for distance sales. If you breach this distance selling threshold to another EU country, you’d normally have to register for VAT there too and start charging local VAT rather than UK VAT.

If the customer is VAT registered in the country you are selling to and you receive their foreign VAT registration number, then you can zero rate (i.e. not charge VAT on) your sale to them. They will then account for VAT themselves under their country’s acquisition tax mechanism (see ‘Acquiring goods from an EU member state’ below).

To apply the zero rate, it is important that appropriate transport documentation is kept to evidence the removal of the goods from the UK to the customer’s site.

Acquiring goods from an EU member state

Here, goods are bought by you (a UK business) from a supplier in another EU country.

Just like a dispatch, you will be charged VAT by the foreign supplier if you are not VAT registered in the UK.

However, if you are VAT registered in the UK and can provide the supplier with your UK VAT registration number they won’t charge you VAT. You then account for this yourself under the acquisition tax mechanism.

The acquisition tax mechanism is a simplification in VAT accounting across the EU, used when goods are sold to a customer who is VAT registered in another EU member state.

If you need to purchase goods from an EU supplier, the supplier can zero rate their supply (i.e. charge no VAT) and you must account for the VAT yourself. It will be charged at the UK VAT rate at the time when the goods entered the UK. You show this on your VAT return by charging yourself the required VAT and, at the same time, recovering this VAT from HMRC.

If you are a fully taxable business who can recover all your VAT then this is merely a paper exercise and it has no effect on how much VAT you owe or receive from HMRC.

Exporting goods to a non-EU member state

If you sell goods to a customer outside the EU, and can prove it through commercial evidence such as bills of lading, then VAT is not normally charged on the sale.

Importing goods from a non-EU member state

When you buy goods from a supplier outside the EU, no VAT will be charged on this transaction by your supplier. Instead, import VAT will have to be paid before the goods will be released from customs.

The amount of VAT is calculated as if the goods were supplied in the UK. So goods which are standard rated will require 20% VAT to be paid. The imported goods may also be subject to Customs Duty depending on the type of good imported.

Services

Selling services outside the UK

When providing services, VAT is accounted for in the country where the place of supply is.

If you’re providing general rule services and your customer is VAT registered, the place of supply is the EU country where your customer is established. In order to avoid far too many VAT registrations, a reverse charge mechanism exists which shifts the obligation to account for this VAT to the customer. This means that no VAT is charged on the sale by the supplier (see below).

The reverse charge mechanism is a simplification for EU businesses to account for VAT on the services they buy and sell. It is very similar in its application to acquisition tax but applies to all services purchased from businesses outside the UK, rather than goods.

Let’s say a business in Spain provides services to a company established in the UK. In this case the place of supply is in the UK and UK VAT needs to be accounted for.

The reverse charge mechanism avoids the Spanish business having to register for VAT in the UK, as the Spanish business can zero rate their sale to the UK business. This shifts the obligation to account for UK VAT on to the UK business.

The UK company accounts for UK VAT by charging themselves the appropriate amount of VAT whilst recovering this VAT on the same return (assuming they are a fully taxable business).

If you’re providing general rule services and your customer isn’t VAT registered, the place of supply is where you, the supplier, are based. Therefore UK VAT is applicable

Buying services from outside the UK

If a UK VAT registered business provides an EU VAT registered business with its UK VAT registration number then they will not be charged VAT. Also, if the supplier of the services is based outside the EU then it is unlikely that any tax will be charged.

In order to account for VAT on these types of purchases, the reverse charge mechanism applies.

Making Tax Digital for VAT – can I just record the daily gross takings?

Making Tax Digital for VAT – can I just record the daily gross takings?

For many businesses, Making Tax Digital changes how transactions must be recorded in their accounting records. Not only does it require the relevant information to be captured digitally, the rules specify precisely what information needs to be recorded in relation to each supply. This may require a change in the method or nature (or both) of these businesses’ record-keeping.


At Cloud Accounting LLP, we have seen numerous queries around how to keep records which are compliant with MTD, but a question which comes up repeatedly is how MTD affects businesses who supply final consumers, but who do not consider themselves ‘retailers’. Examples could include restaurants and cafes, car wash businesses, and even a different revenue stream within a non-retail business such as a bar or a gift shop within a B&B or hotel. I will refer to them as ‘cash businesses’ in the remainder of this article.

Summary

Retailers and other cash businesses (those who sell to an end consumer) do not need to capture the details of each individual supply they make in their digital records, but they do need to record the total of all retail supplies for each day of trading – it cannot be done on a less frequent (eg weekly) basis.

This can be done on a simple Monday – Friday spreadsheet. In certain circumstances it may be necessary to split gross takings between those supplies that are zero rated and standard rated.

Read on if you want to understand the detailed legislation behind it:


Record keeping requirements

Let’s first look at the basic requirements and consider why cash businesses may find these difficult to comply with.
The Value Added Tax (Amendment) Regulations (2018 No. 261) state that the following information must be captured within the digital records:
(3) Subject to paragraph (4) the information specified for the purposes of paragraph (1) for each accounting period is—
(a) subject to sub-paragraph (c), for each supply made within the period—
(i) the time of supply,
(ii) the value of the supply, and
(a) subject to sub-paragraph (c), for each supply made within the period—
(i) the time of supply,
(ii) the value of the supply, and
(iii) the rate of VAT charged;
Paragraph (c) provides some relaxation from these rules:
(c) where more than one supply is recorded on a tax invoice and those supplies are either—
(i) supplies made which are required to be accounted for in respect of the same prescribed accounting period and are subject to the same rate of VAT, or they may be treated as a single supply for the purposes of … sub-paragraph (a)…
These rules are repeated in paragraph 4.3.2 of the VAT Notice (700/22).


Most readers will be aware that the word ‘supply’ in VAT has a particular meaning, and is much more granular than the amounts recorded on an invoice or statement, or amounts paid or received. So, businesses who make lots of individual supplies, particularly to end customers for whom they are not required to supply a VAT invoice, would have difficulties complying with the above record-keeping requirements of MTD.


Relaxation for retailers

Fortunately, all is not lost. Provision has been made in the Regulations to relax the above requirements in particular circumstances:
(4) The information specified in paragraph (3) may be varied by direction of the Commissioners to make provision about—

(c) the operation of retail schemes under Part 9 of these Regulations (supplies by
retailers);
Paragraph 4.5 of the VAT Notice provides that relaxation in a paragraph which has the force of law:
In addition to the records listed in paragraph 4.3 above, if you account for VAT using a retail scheme you must keep a digital record of your Daily Gross Takings (DGT). You are not required to keep a separate record of the supplies that make up your DGT within functional compatible software.
For more information on retail schemes and Daily Gross Takings see VAT notice 727: retail schemes.


So, retailers do not need to capture the details of each individual supply they make in their digital records, but they do need to record the total of all retail supplies for each day of trading – it cannot be done on a less frequent (eg weekly) basis.
But the question remains – does this relaxation include ‘non-traditional’ retailers ie the cash businesses described above?


What is a retailer?

There is no definition of ‘retail’ or ‘retailer’ in the VAT Act or the VAT Regulations. HMRC provide a definition in the retail scheme VAT Notice (727) as follows:
Retail is the selling of goods or services to consumers [and the retail schemes are aimed at retailers that cannot account for VAT using normal accounting].


Accounting for VAT in the normal way does not require businesses to issue a tax invoice to unregistered customers, but it does require them to identify, for each sale, the tax exclusive value and the VAT, and to be able to produce periodic totals of those amounts. Many cash businesses will not be able to do this, because of the level of information they retain in relation to each sale they make – even if they use electronic tills.


Therefore, in accordance with the definition above, and as HMRC has also kindly confirmed to us, cash businesses are considered to be retailers for these purposes. Cash businesses are likely to be covered by the point of sale scheme. This applies where the business is identifying the VAT rate when they make the sale and, if all sales are standard rated, they simply apply the VAT fraction to calculate the VAT due. As there is no retail scheme calculation per se to undertake then these businesses often do not realise that they are using a retail scheme.


So, these cash businesses can therefore benefit from the relaxation set out above in relation to their retail sales ie they can simply record their Daily Gross Takings in their digital records. They do not need to record each individual sale, nor is a digital link required between their tills and their accounting records – the input of the Daily Gross Takings is the start of the digital journey.


Any non-retail sales will need to be recorded in the digital records on a supply-by-supply basis as they do not benefit from this relaxation.

CLOUD ACCOUNTING LLP

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Name: Cloud Accounting LLP
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