Introduction 

As a limited company contractor in the UK, there may come a time when you will be recharging expenses to your client or customer. Likewise, you may need to recharge expenses from the outset when you start your new UK contracting business. Moreover, these scenarios may arise as part of your work, if you begin to incur costs on behalf of your client. As a result, you should be aware of the process which is involved. Therefore, how do you create a recharge invoice for your work and in addition how do you recharge VAT on expenses on your contractor invoice?

If you work as a UK IT contractor or as a contractor in another industry, you may incur expenses while you perform your work. Therefore, during your contract work such expenses may be rechargeable costs which you can bill to your company’s client. As a result, you will be charging expenses back to your client. In many cases, you will incur these costs directly on behalf of your client. Therefore, such costs could include:

• Your IT contractor expenses which you incur while you carry out your work. For example, you may incur expenses when you travel to your worksites. For example you may drive to your work site and incur business mileage. On the other hand, you may travel by train or taxi to a work location.

• The cost of any goods which you pay for on behalf of a customer. For instance, you may acquire some goods for your client, such as equipment.

Initial thoughts

What to consider for your recharge invoice

With regard to whether you will be recharging expenses while contracting, this will depend on both your client and the industry you work in. In today’s world many limited company contractors will incur travel costs when they visit their work locations. As a result, they may end up charging travel expenses to clients on a recharge invoice. On the other hand, some UK contractors or consultants may also incur goods costs directly on their client’s behalf. To sum up, in both instances it could be the contractor’s duty to pay for the goods or services on their customer’s behalf.

When you incur the cost of expenses or goods as part of your work, can you recharge these? Indeed, it follows that you should be allowed to recharge the cost to your client. However, this will be based on the agreement between you and your client. To sum up, when you are allowed to recharge expenses there is a certain process for you to follow.

When you raise an invoice for your work through your own contractor limited company, what is the correct procedure when you are charging expenses back to your client? In addition, how do you show the recharge of expenses cost on your contractor invoice? To sum up, the correct way to show your recharged costs is a common confusion among many UK contractors and we will look into this further on.

Further initial thoughts

It is not very easy to find out how to show the recharge of costs correctly on your invoice. Certainly, in most cases many clients may not be clear about how you should recharge costs or about the recharging expenses VAT element. In short, most will expect that you know how to do this yourself. Therefore, you can research this on the web through HM Revenue & Customs (HMRC) and other websites. When you search for this, you may find that the process of how to do this is not very easy to locate. To sum up, this article aims to explain clearly what you have to do when recharging costs to your client. That is to say, we will also explain how you can recharge the VAT correctly.

Any goods or services which you pay for, which are a cost to your client, should be shown on your invoice to your client. Therefore, when you do this, you should show the costs separately on your contractor invoice. Similarly, you could also attach an expense recharged list to your invoice. In conclusion, you will need to make it clear on your invoice or expenses recharged list which elements are for.

What to consider first

Which details to show on the invoice to your client 

When you create your invoice to your client, there should be two main components to detail on this:

• The details of your consultancy fees for your UK contracting work. For example, this may be the number of hours or days worked along with dates that you did the work and your rate of pay. On the other hand, you may charge a fixed fee for a block of work and have a reference which you can quote for the particular work that you are invoicing for now.

• Any expenses or costs which you have incurred in line with your work. To clarify, these expenses will rate to the same period of time as your consultancy fees in the first point above.

Additional thoughts

As a side note, you could create invoices to send to your client in your home office. What’s more, when you create invoices for your clients, you could use an online accounting platform. Certainly, many of the online systems which are now on the market will help you to create your contractor invoices.

Do you charge VAT when recharging expenses? 

Recharge invoice and the VAT rules around this

Can you charge VAT on travel expenses? In addition, how about other types of costs which you recharge? To sum up, in this article we will look into this in more detail and consider when do you charge VAT on recharged expenses?

Under UK VAT rules, you must show the rechargeable expenses as separate items on your invoice, when you are charging expenses back to your client.

When you make the recharges to your client, the costs that you incur on their behalf will more than likely include travel costs. Likewise, your expenses may also include some sundry costs too. Indeed, when you recharge your costs, you must follow the correct recharge process.

Rechargeable expenses -the types of costs which do and do not include VAT 

A key thought is that most costs which you recharge for your contracting work will include VAT, but some do not. Therefore, when there is a recharged expenses VAT element, the next two factors will apply:

• First, the expense will include VAT, i.e., it will be standard-rated. To clarify, most costs include VAT, but some do not. In contrast, the types of costs which do not include VAT are rail fares, tube fares, flights, and some others.

• Next, the supplier will be VAT registered. That is to say, if the supplier is VAT registered, there will be a VAT number on their invoice or receipt. For example, large hotels will be VAT registered, but many small B&Bs and taxi firms will not be.

Your recharge invoice and VAT inclusive costs

The current rate of VAT in the UK is 20%. Therefore, if you incur a hotel bill of £100.00 + 20% VAT, the total expense cost will be £120.00. As a result, the amount you should to list on your expenses is £100.00.

On the other hand, if you have train tickets which total £50.00, the amount you should list on your expenses will be £50.00. To sum up, this is because there is no VAT on rail fares. Therefore, there is no VAT to deduct from this.

The formula to use when you add VAT to your recharge invoice

How to do this

How should you treat a payment for an expense which includes VAT compared to one that does not? Further to this, how much should you recharge to your client in relation to such costs? To sum up, when we research HMRC guidelines in relation to this there is a formula to use. Therefore, when you invoice your client for expenses, you should apply this formula each time. So, when you work out what to recharge for your costs what is the formula to use? Most importantly, the formula applies to all types of costs which you may recharge as part of your total invoice to your client.

The actual formula 

Most importantly, the formula you should use when you recharge your UK contracting expenses to your client are as follows:

• First, please reduce any standard-rated costs to their pre-VAT amount in your contractor invoice or expenses list. Most importantly, an expense which includes VAT will be a VAT-inclusive service or supply of goods. Certainly, standard-rated expenses will include travel costs such as hotel bills, parking fees and meals out. On the other hand, certain costs like flights and rail fares do not include VAT and as a result these are zero-rated costs. In conclusion, when a business is VAT registered, the invoice/receipt from the supplier will contain a VAT number.

• Second, please add up all of your expense amounts after the reduction for UK VAT as in the first point above. Once you have done this, you will arrive at a sub-total of your expenses.

• Next, add your expenses sub-total from the second point above to your consulting fees. As a result, you will arrive at a second sub-total.

• The next step when your business recharges VAT, is to add VAT at 20% to the second sub-total. To clarify, this is the actual VAT on the recharged expenses.

• Finally, you will arrive at the total to be billed. In conclusion, this is the total amount that is billable to your client which they can pay to your company in due course.

 Recharge invoice -conclusion

When you follow the above process from start to finish, you will recharge your costs and expenses correctly. As a result, the VAT recharges on your invoice in respect of the recharged expenses will also be right. To sum up, the resulting factor is that you have recharged your expenses and the VAT elements correctly to your client. Therefore, please follow this process in the future and your invoicing will be accurate and correct.

Examples

How do recharged expenses and the VAT on recharged expenses look on your invoice?

When you are ready to recharge expenses, what is a recharge invoice and how does it look? Certainly, when you create your recharge invoices, these will include your expenses recharged. On the other hand, you might be billing for your expenses recharged separately. However, your UK contractor invoice may also include your supply of goods or services. In conclusion, when you are ready bill your client, please take note of the below as part of charging VAT on expenses:

• If your hotel bill comes to £120 and this includes standard-rated VAT at 20%, you should net this down to 100/120ths. Therefore, you can multiply £120 x 100/120. Likewise, you can also use 5/6ths as a simplified formula instead of 100/120ths. In short, the result is £100, and this is the amount you will charge your client.

• If your rail fare came to £50, you will recharge £50 to your client. As we mention earlier, rail fares do not include VAT and are therefore these are zero-rated. In short, the amount to recharge in respect of this is the £50.

An example of recharging expenses

When you recharge expenses upon your recharge invoice, you will list these out along with the cost of each one. In short, here is a basic summary of how your expenses recharged for your contracting work may look:

An example of your recharge invoice once you have recharged expenses

When you are charging costs and charging VAT on expenses as a UK contractor, your actual contractor invoice may include both your consulting fees and your expenses. In conclusion, your invoice could look like this:

In the above example, the VAT recharge of £633.33 is the VAT on the consulting fees and the pre-VAT recharged expenses.

A further example of how your recharged expenses may look

On your invoice or your client’s expenses form, you can set out the costs you recharge different from the above. To clarify, when you are recharging costs, it shows the VAT element that is separately applicable to both your contracting fees and expenses:

Summary -UK contractor recharge invoice

As a contractor, when you are recharging expenses, you will do the `netting down’ process for any goods and services. In conclusion, this will make sure the VAT on expenses recharged is correct. Therefore, when you perform this process, the result is:

• Charge VAT on expenses that did not originally include VAT. To clarify, this is effectively an extra charge to your customer on top of the costs which you incurred.

• Charge the VAT back on the costs that did originally include VAT in the first place. In other words, you are restoring the VAT cost such that you are recharging the original cost of the expense.

The above process is the correct way to charge expenses while you are UK contracting. To summarise, the result of this is the VAT element on the expenses that did include VAT on the original cost is restored. On the other hand, the VAT on the expense that did not originally include VAT is in effect an addition to the cost of the original expense.

Other considerations

VAT guide

We have a detailed VAT guide for UK contractors on this website. Most importantly, this explains the UK VAT system in more detail. Not only does the guide covers how VAT works for UK contractors but it also contains all the main aspects about VAT and is a handy read for most small business owners. In conclusion, this guide covers many tips and advice around VAT when you run your own business.

When you do not follow the correct process

If you do not follow this process when you are charging expenses back to your client, you will, in effect, charge the VAT element to them twice. As a result, this will cost your client more. In this case, you should consider contacting your customer/client to try and sort this out. Likewise, as an alternative you can decide to leave this as it is and:

• Be aware that you did not do this correctly in the first place. As an aside, you should make a note that HMRC could pick up on this later.

• Second, please make sure you charge VAT on expenses correctly going forward.

Final thoughts 

When you recharge your costs, it is key to account for the VAT on expenses correctly. To sum up, when you do the `netting down’ process, you are in effect charging VAT on any zero-rated costs that did not include VAT in the first place. In the same vein, as part of the process you also restore any `netted down’ standard-rated expenses to their original costs. In conclusion, the process which we describe here is the correct method when you recharge expenses to your client.

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