Recharge invoice

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Introduction 

As a UK contractor running your own company, you may need to start recharging expenses to your client. Likewise, you may need to recharge expenses from the outset when you set up your company and start your new UK contracting business. This could arise as part of your work, if you begin to incur costs on behalf of your client. When you create an invoice for recharged expenses, there’s a certain correct way to do this. As a result, you should be aware of what is a recharge invoice and how the contractor cost recharge (UK) process works. What’s more, you should know how to create an expense invoice and how to recharge VAT on expenses on your contractor invoice. In this guide, we’ll look at the UK recharge invoice meaning. We’ll also look at the process how to invoice your expenses and we’ll go over some Invoice examples (UK).

Later on, our examples of invoices for contractors will show how to invoice your expense recharge correctly. As part of this, we’ll consider do you charge VAT on recharged expenses? The answer to this is you do and our invoice examples for contractors show how to add and recharge VAT correctly. 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’ll be charging expenses back to your client. In many cases, you’ll incur these costs directly on behalf of your client.

Initial thoughts

What to think about for your contractor recharge invoice

Whether you’ll be recharging expenses while contracting, 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 contractor company recharge invoice. On the other hand, as a UK contractor, you may have the responsibility to pay for certain goods or services on behalf of your customers. If this is the case, then it’ll be that the customer knew that the goods are being paid for by you. Therefore, in due course, it can be confirmed that the customer received these safely. In this second case, you’ll incur goods and expenses costs directly on your client’s behalf.

In both instances, the contractor will incur goods or services on their client’s behalf. What’s more, when you incur costs, can you recharge your contractor expenses that consist of the goods or services you paid? Indeed, it follows that when you paid the supplier for a cost that relates to your work, you should be able to invoice the cost to your client. Although, this’ll be based on the agreement between you and your client. To sum up, if you’re allowed to recharge expenses, there’s a certain recharge process for you to follow. Therefore, in this guide we’ll look into accounting for recharged expenses and the process to follow when you do this.

Initial thoughts on invoicing expenses to your client

When you raise an invoice through your contractor limited company, what’s the correct routine for charging expenses back to your client? What’s more, 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. Therefore, we’ll look into how to work out the invoice recharge amount later on.

As a contractor, you’ll likely register for VAT when you first start your company. Therefore, as part of your work, you’ll issue VAT invoices to your customers or clients. When you incur costs as part of your work, some of these will be billed to you including VAT. Therefore, as part of the invoice routine we should also ensure the recharge of costs and the VAT calculations upon these which you show on your invoice are correct. Therefore, such costs and an expense recharge could include:

  • Your IT contractor expenses incurred when you carried out your work. For example, you may incur a contractor trip charge each time you travel to your worksites and have invoices or an invoice for travel expenses. What’s more, 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 and have a travel expense invoice or receipt in respect of this.
  • The cost of any goods you pay for on behalf of a customer. For instance, you may acquire some goods for your client, such as equipment.

Common questions

There’ll be many common questions from UK contractor and small business owners, when they invoice costs to their client. Therefore, in respect to when your invoice expenses and are charging vat on recharged expenses, such questions may include:

  • How to charge client for travel expenses.
  • How to invoice for expenses.
  • What should I do when billing client for travel expenses?
  • How to invoice for travel expenses.
  • Is vat charged on train tickets?
  • Do I charge vat on expenses?
  • What are rechargeable expenses?
  • Do I charge vat on mileage expenses?
  • When do I charge vat on travel expenses?
  • Do you charge vat on expenses to clients?

In this guide, we’ll research in depth what to think about when charging clients for travel expenses and other costs. What’s more, we’ll look at when should I charge VAT on expenses and how to work out your recharge expenses VAT.

Further initial thoughts

Previously, it wasn’t very easy to find out how to recharge costs or work out VAT on recharges on your invoice. Indeed, many clients may not be clear about how you should recharge costs or about the recharging expenses VAT element. In short, most clients will expect that you know how to invoice your cost recharges. Therefore, you can research this on the web through HM Revenue & Customs (HMRC) and other websites. Now, HMRC have a page on `VAT: costs or disbursements passed to customers’ which covers the recharge process. In this guide, we aim to explain clearly what you must do when you are a contractor recharging costs to your client. That’s to say, we’ll also explain how you can recharge 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 separate on your contractor invoice. What’s more, you could also attach an expense recharged list to your invoice. To sum up, you’ll need to make it clear on your invoice or expenses recharged list which elements are for.

What to think about first for your recharge invoice

Which details to show on the invoice to your client 

When you create your invoice to your client, there’s two main areas to detail here:

  • The details of your consulting 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 work that you are invoicing for now.
  • The amount of each cost for any services or expenses which you incur in line with your work. To explain more, these expenses will relate to the same period of time as your consultancy fees in the first point above.

Extra 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. Also, many of the online systems which are now on the market will help you to create your contractor invoices. What’s more, many contractors will use an online platform and share access to this with their contractor accountant.

Do you charge VAT when recharging your contractor expenses? 

Recharging expenses and the VAT rules around this

Can you charge VAT on travel expenses in relation to your business journeys? What’s more, how about other types of costs which you include on your expense invoice? To sum up, in this guide we’ll look into this in more detail and find out when do you charge VAT on recharged expenses? What’s more, we’ll explain how to recharge expenses and how to work out the VAT element on your invoice.

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 the 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 invoice your costs to your customer, you must follow the correct recharge process.

Rechargeable expenses -the types of costs which do and don’t include VAT 

A key thought is when we consider expenses, they are either standard rated or exempt. If they are standard rated, they include VAT at 20%. Most UK costs which you invoice for your contracting work will include VAT. Therefore, when there’s a UK recharged expenses VAT element, the next two factors will apply:

  • First, the expenses invoice will include VAT, i.e., these are standard rated expenses. To explain further, most invoicing costs include VAT, but some don’t. In contrast, there’s some types of costs which don’t include VAT. For example, there’s no VAT on train fares, tube fares, flights, and some others.
  • Next, the supplier will be VAT registered. That’s to say, if they are VAT registered, there’ll be a UK VAT number on their invoice or receipt. For example, you may have an expenses bill for accommodation while working away. Many large and medium sized hotels will be VAT registered and their invoice will show their VAT number. What’s more, a small B&B or taxi invoice may not show a UK VAT number as many aren’t UK VAT registered.

HMRC customer forums have a page which includes some questions from the public on recharging costs.

Your company 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 expense invoice as an expense recharge 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’s no VAT to deduct from this.

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

How to do this 

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

The actual formula for your recharge invoice

The formula you should use when you bill your UK contracting expenses to your client is as follows:

  • First, please reduce any standard-rated costs to their pre-VAT amount in your contractor invoice or expenses list. Indeed, an expense which includes VAT will be a VAT-inclusive service or supply of goods. 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 don’t include VAT and therefore these are zero-rated costs. To sum up, when a business is VAT registered, the invoice/receipt from the supplier will contain a VAT number.
  • The next step is to 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’ll 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’ll 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 mentioned in the previous point above. To clarify, this is the actual VAT that you charge on the total of the netted down recharged costs and your consultancy fees. Once you add the VAT, you’ll arrive at a third sub-total of the consultancy fees/expenses and the VAT.
  • After step 4 above, you’ll arrive at the total amount to be billed. To sum up, this is the total amount that you bill to your client which they can pay to your company’s business account in due course.

UK recharge invoice -conclusion

When you follow the above recharge process from start to finish, you’ll invoice your costs and expenses correctly. As a result, the VAT recharges on your company recharge invoice in respect of the costs that you charge will also be correct. To sum up, the result is that you have recharged your expenses and the VAT elements correctly to your client. Therefore, please follow this process for each expense recharge in the future and your company invoice and recharge expenses VAT will be correct.

In most cases, UK contractors bill large companies who are indeed VAT registered themselves. Therefore, when you raise your invoice to them, they can claim back the VAT and if you charge this correctly, the VAT will be correct at their end too.

Invoice examples (UK) 

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

When you’re ready to bill your expenses, what is a recharge invoice and how does it look? Indeed, when you create your company recharge invoices, these’ll include your expenses recharged. On the other hand, you might be billing for your expenses recharged on a separate invoice. What’s more, your UK contractor invoice may also include your supply of goods or services. To sum up, when you’re 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’ll charge your client.
  • If your rail fare came to £50, you’ll bill £50 to your client. As we mention earlier, rail fares don’t include VAT and as a result these are zero-rated. In short, the amount to invoice in respect of this is the £50.

An example contractor invoice which shows recharging expenses

When you bill your expenses upon your invoice, you’ll produce a contractor expenses list of each cost that you are charging, along with the cost of each item. It’s important that you show the gross and net amount on your invoice. In the table below the `gross amount’ is the expense cost and the net amount is the `reduced expense’. What’s more, here is a basic summary of how your expenses recharged for your contracting work may look:

Expense cost VAT amount Reduced expense
Hotel bill 120.00 20.00 100.00
Rail fare   50.00   50.00
Meal   20.00   3.33   16.67
The total expenses to invoice 166.67

An example of your contractor recharge invoice when you bill your costs

When you’re 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 this example, the net amount on an invoice is the `charges’ column and its key to note that the total of your `charges’ will be what you charge VAT on. To sum up, your invoice could look like this:

Gross VAT Charge Total charges
Consulting fees 3,000.00
Expenses
Hotel bill 120.00 20.00 100.00
Rail fare 50.00   50.00
Meal 20.00 3.33   16.67
Total expenses 166.67    166.67
Total fees & expenses 3,166.67
VAT at 20%    633.33
The total to bill to the client 3,800.00

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

A further example of how your invoice for expenses may look

On your expenses invoice or client’s expenses form, you can set out the costs you invoice different from the above. To sum up, when you are contractor company recharging costs, it’s key to note that your invoice shows the VAT element which is separate to both your contracting fees and expenses:

Gross VAT Charge Charges VAT at 20% Total
Consulting fees 3,000.00 600.00 3,600.00
Expenses
Hotel bill 120.00 20.00 100.00
Rail fare 50.00   50.00
Meal 20.00 3.33   16.67
Total expenses 166.67      166.67    33.33     200.00
The total to bill to the client 3,166.67 633.33 3,800.00

Summary for a UK contractor recharging expenses

As a contractor, when you’re recharging expenses, you’ll do the `netting down’ process for any goods and services. To sum up, this’ll make sure the VAT on expenses recharged is correct. Therefore, when you perform this recharge process, the result is:

  • Charge VAT on any costs that didn’t include VAT to begin with. To explain further, this is an extra contractor charge to your customer on top of the costs which you incurred.
  • Charge the VAT back on the costs that did include VAT in the first place. In other words, you’re restoring the VAT cost such that you’re billing the original cost of the expense.

The above process is the correct way to charge expenses on your invoice while you’re UK contracting. To sum up, 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 didn’t include VAT is in effect an addition to the cost of the original expense. For further clarification, here’s another guide from a top UK accountant on cost recharges to your client.

Other thoughts

VAT guide

We have a detailed VAT guide for UK contractors on this website. Indeed, this explains the UK VAT system in more detail. Not only does this cover 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. To sum up, our guide covers many tips and advice around VAT when you run your own business.

When you don’t follow the correct recharge process

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

  • Be aware that you didn’t do this right 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 all your costs correctly going forward.

Final thoughts 

When you invoice your costs, it’s key to recharge VAT on expenses correctly so that when you’re paying the VAT to HMRC, this is correct. To sum up, when you do the `netting down’ process for each expense recharge, you’ll in effect recharge VAT on any zero-rated costs that didn’t include VAT in the first place. Likewise, as part of the recharge process you also restore any `netted down’ standard-rated expenses to their original costs. To sum up, the process which we describe here for is the correct method when you recharge expenses and charge VAT on these to your client.

Link to Contractor Advice UK group on

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Published On: January 4th, 2024 / Categories: First timer guide, Invoicing /

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One Comment

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