Charging your Clients VAT on Recharged Expenses

Magali Sire

Magali Sire

Content manager

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If you have negotiated an arrangement where you will be invoicing your clients for your expenses, you need to make these amounts very clear on your invoices. You also need to take care to ensure that you are billing your clients the correct amount of VAT on recharged expenses


Why You Need to Charge your Clients VAT on Recharged Expenses



Expenses are “recharged” to the client plus VAT at the same rate that your business charges. Normally, this would be 20%. To put it another way, if you recharge costs to a client, you are required to charge VAT; the expense was for you instead of the client. Your employee travelled by train or took the flight and stayed in the hotel, not the client. 


HMRC explains charging VAT on recharged expenses further:


“Any costs that your business incurs itself in the course of supplying goods or services to customers are not disbursements for VAT purposes.” If your company is selling a standard rated product or a service and you incurred certain expenses while doing that, you must charge VAT on your expenses. If your company incurs a cost your client’s behalf, these costs need to be passed along to them. The gross amount is billed to the client without adding VAT.  



How to Record VAT on Billable Expenses



When billing a client for VAT, you will use the same rate that your company paid for the expense. To determine the correct amount of VAT, the easiest way is to refer to the receipt. 



Charge VAT on Recharged Expenses



If your business is registered for VAT, you must charge VAT on each of your billable expenses. This rule applies even if you were not charged VAT. The following represent examples of common expenses and how they are treated when billing a client. 



Mileage and Fuel



Say you have negotiated a rate of 45p per mile with your client. You will charge this rate per mile driven by employees plus an additional 20% VAT. Your fuel expenses may be charged to your client at the rate paid, plus VAT, as long as you use the same policy for all company vehicles. 



Hotel Accommodation



In this case, you bill your client the exact amount you paid for the accommodation, which includes VAT. This is the standard rate.






Parking fees are recharged to the client at the same rate you or employee paid. 






Generally speaking, flights are zero rated. You charge a client what you paid. An extra 20% is added for VAT. 



Train Fare



Train tickets are also zero rated. You charge a client the same amount you have paid, plus an additional 20% for VAT. 



Business Entertaining



Your company may be involved in entertaining clients. Charge VAT on recharged expenses for business entertainment costs, including booking a venue for holding an event or buying business gifts with a value of up to £50 per person in a tax year. 






Your company incurs postage cost when you send letters to clients. These are part of the cost of doing business. If you recharge your postage costs, you must add VAT.



Bank Transfer Fees



You may be charged a bank transfer fee when moving funds from your business account to a client’s account. The bank fee may be exempt from VAT. However, if you recharge the fee to your client, you are required to charge VAT on it. The reason is because your business was providing a service to your client 


General Rule About VAT: It must always be charged; however,you cannot charge VAT on VAT. If you did not pay VAT on a particular expense, then go ahead and charge your client VAT. If you paid VAT on the expense, don’t charge VAT on it a second time. That amounts to double-dipping and HMRC will not approve it. 



Zero-rated or Exempt Suppliers



In a situation where your main supply is either exempt from VAT or zero-rated, any expenses recharged to your clients would be zero-rated or exempt. Recharge expenses at the regular VAT rate if your primary supply of goods and services is not considered standard.



How to Deal with Client Disbursements



If your company buys something for a client for the client’s benefit, these items are not considered business expenses. Instead, they are disbursements. 


To qualify as a disbursement, all of these conditions must apply:

  • You paid the vendor on behalf of your customer. At the time, you were acting as your customer’s agent.
  • Your client was responsible for paying for the goods or services. 
  • You had your client’s permission to pay for the items.
  • The client used, received, or otherwise benefitted from the goods or services paid for them.
  • The client was aware that the goods or services received were provided by another company. 
  • When invoicing your client, you must show the costs separately from services provided directly by your company. 
  • Any goods and services paid for by your company are billed as add-ons to your company’s services. 


A good way to determine whether an item is a disbursement or an expense is to consider its line of supply. Suppose the line of supply runs from the supplier to your company on behalf of a client. Your company must pass on the gross amount of VAT charged by the supplier to your client. Your client will pay the VAT charged by the supplier (the full amount of the original invoice to you). Your company doesn’t end up making money on disbursements. 


Difference between an Expense and a Disbursement: If you buy a plane ticket for an employee (or yourself) to go to your client’s office to attend a meeting, it is considered an expense. VAT is payable on this amount when you invoice the client. 


Suppose you and a client will be attending an event. You buy the plane tickets so that the two of you can travel together. In that case, you can charge the cost of the client’s ticket as a disbursement without adding VAT. 



Expenses v. Disbursements re Costs



If you and your client have both registered for VAT, then it doesn’t make much difference if a cost is treated as an expense or a disbursement. You will be able to recover VAT on recharged expenses to your client, who will then recover the VAT on the purchase. 


If your client is not registered for VAT, they will have to pay the additional VAT on the recharge of your expenses. 



How to Correct an Accounting Error on Recharged Expenses



Accounting errors can be corrected by going back and amending them. Raise credit notes against invoices that have the wrong values on them and prepare new invoices with the correct VAT charged on your expenses. Contact your clients and ask them to pay the difference. 



Keep your Expenses Organized with Mooncard



It can be challenging to track the VAT on recharged expenses. Mooncard is a complete payment system that makes it easy for your business to automate its expense reports. Each time an employee charges an expense on Mooncard, the employee takes a photo of the receipt. The proof of the expense is digitally stored for future reference. 


The employee’s expense report is pre-filled using data gathered from the bank transaction. This includes the amount spent, the nature of the expense, the amount of VAT, etc. The amount of recoverable VAT is automatically calculated by the software, which means it is always accurate. 


All the employee expense information is sent to accounting. There is no need to re-enter anything. Your team can process the expenses immediately.


To discover more about Mooncard and how it can assist you with managing VAT for your business, contact us today to book an online demo. 


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Magali Sire

Magali Sire

Magali Sire is Marketing & Brand Content Manager at Mooncard. An entrepreneur and experienced copywriter, she has been a Swiss Army knife for over 20 years in BtoB and BtoC, research, economic and financial media and retail, and is passionate about the development of support professions.