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Archive for Bookkeeping

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.

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Stay on the right side of HMRC Business Record Checks

HMRC Business Record Checks programme is designed to ensure that small business owners are keeping their records up to date. HMRC wants business owners to pay the right amount of tax at the right time.

HMRC Business Record Checks

Don’t put off the paperwork - keep your books up to date

The most important thing you can do is to make sure that your business books are updated regularly. This isn’t just because HMRC require you to, but it’s also essential to know where you are in your business. When your records are up to date, not only can you pick up on crucial information quickly. You can also easily respond to any HMRC enquiries without the stress of searching for scraps of paper!

To make sure your books are up to date, ensure that:

  • your bank account balance matches the balance in your accounts.
  • you have issued and kept a copy of invoices for all money received.
  • you have copies of receipts for all costs in your business.  Remember that in most cases HMRC will accept scanned receipts instead of hard copies!

Online Cloud Accounting systems can really make the above three processes much more efficient and easy to handle.

Avoid accounting errors that trigger an automated HMRC Business Record checks

Unusual activity in your tax records or accounts could flag you up for HMRC review.

While some HMRC checks are entirely random, most are triggered by HMRC’s Central Risk team. They use sophisticated data mining tools to spot unusual activity on accounts, or trends in particular industries. For example, HMRC detects companies with activity that falls outside the normal parameters in their industry.

To keep HMRC’s systems happy, it’s important to keep your records up to date and as error-free as possible. If you’ve had a problem lurking in your books that you’ve been vainly hoping would just go away, now’s the time to ask your accountant for guidance or contact HMRC to sort it out. To keep the errors at bay and save time, try automating some of your day-to-day bookkeeping work..

File your tax and VAT returns on time

HMRC Business Record Checks are more likely to happen when your tax filings late. Making sure you’re staying on top of your tax obligations can help.

When HMRC is happy, you’re happy too!

One of the best parts about staying in HMRC’s good graces is that your business will benefit from tidy, up-to-date records. You’ll not only be ready if HMRC has an enquiry, but you’ll also know how your business is doing on a day-to-day basis.Otherwise you're waiting until the end of the month, quarter, or even tax year to find out about any problems.

 

CLOUD ACCOUNTING LLP

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