Recharge invoice

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Introduction 

As a UK contractor running your own company, you may have to start recharging expenses to your client. Likewise, you may have to bill your costs 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 particular correct way to do this. As a result, you should be aware of what a recharge invoice is 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 what to consider when you recharge expenses and review some examples of invoices (UK).

Later, 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 costs. The answer 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, such expenses may be rechargeable during your contract work, which you can bill to your company’s client. As a result, you’ll be charging your client for expenses. In many cases, you’ll incur these costs directly on behalf of your client.

Initial thoughts

First thoughts on on recharging work expenses

Whether you’ll be billing expenses while contracting depends on 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 their invoices. On the other hand, as a UK contractor, you may be responsible for paying for specific goods or services on behalf of your customers. If this is the case, then it’ll be a case of the customer knowing that you are paying for the goods. Therefore, in due course, it can be confirmed the customer received these safely. In this second case, you’ll incur costs for goods and expenses 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, including the goods or services you paid for? Indeed, when you pay the supplier for a cost relating to your work, you should be able to invoice the cost to your client. However, this will be based on the agreement between you and your client. To sum up, if you’re allowed to recharge your expenses, there’s a specific billing process for you to follow. Therefore, in this guide, we’ll research accounting for recharged costs 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 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 research how to work out the invoice recharge amount later.

As a contractor, you’ll likely register for VAT when you start your company. Therefore, you’ll issue VAT invoices to your customers or clients as part of your work. When you incur costs as part of your work, some of these are billed to you, including VAT. Therefore, as part of the invoicing routine, we should ensure that your invoice’s cost recharge and VAT calculations 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. Moreover, 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 for 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.

Further initial thoughts

Previously, finding out how to recharge costs or work out VAT on recharges on your invoice wasn’t easy. Indeed, many clients may not be clear about how you should recharge costs or the VAT element when recharging expenses. In short, most clients will expect you to know how to invoice your cost recharges. You could research this online through HM Revenue & Customs (HMRC) and other websites. Now, HMRC has a page on `VAT: costs or disbursements passed to customers’, which covers the recharge process. This guide aims to explain clearly what you must do when you’re a contractor recharging costs to your client. That’s to say, we’ll explain how to charge VAT correctly.

Any goods or services you pay for, which are a cost to your client, should be shown on your invoice. Therefore, you should show the costs separately on your contractor invoice when you do this. Moreover, you could attach a list of the expenses to your invoice. To sum up, you must clarify what the costs relate to on your invoice or expenses recharged list.

What should you consider first for your recharge invoice?

Which details should be shown on your client invoice? 

When you create your invoice to your client, there are 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, the dates you did the work, and your pay rate. 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 you’re invoicing for now.
  • The amount of each cost for any services or expenses you incur in line with your work. To explain more, these expenses will relate to the same work period 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. When you create invoices for your clients, you could use an online accounting platform. Many online systems on the market will help you create your contractor invoices. Moreover, many contractors will use an online platform and share access to this with their contractor accountants.

Do you charge VAT when recharging your contractor expenses? 

Recharging your expenses & the VAT rules around this

Can you charge VAT on travel expenses related to your business journeys? What’s more, how about other costs you include on your expense invoice? In this guide, we’ll research this and determine when you charge VAT on your rechargeable expenses. We’ll also explain how to recharge expenses and 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’re charging expenses back to your client.

When you make the recharges to the client, the costs you incur on their behalf will likely include travel costs. Likewise, your expenses may consist of other costs, too. Indeed, when you invoice your costs to your customer, you must follow the correct billing process.

What types of rechargeable expenses do & don’t include VAT? 

A key thought when considering expenses is that they’re 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 following two factors will apply:

  • First, the expenses invoice will include VAT, i.e., standard-rated expenses. To explain further, most invoicing costs include VAT, but some don’t. In contrast, some types of expenses don’t include VAT. For example, there’s no VAT on train fares, tube fares, flights, etc.
  • Next, the supplier is VAT registered. That’s to say, if they’re 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 are VAT registered, and their invoices to guests will show their VAT numbers. Moreover, 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 with public questions on billing costs and expenses.

Your company invoice & 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 is £120.00. As a result, the amount you should list on your expense invoice as a cost recharge is £100.00.

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

What formula should you use when adding 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 your client concerning such costs? To sum up, when we research HMRC guidelines, there’s a formula to use. Therefore, when you invoice your client for expenses, you should apply this formula each time. However, what is the formula for determining what to charge for your costs? Indeed, this formula applies to all types of expenses which you may bill as part of your total invoice to your client.

The formula to use when recharging costs

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

  • First, please reduce standard-rated costs to their pre-VAT amount in your contractor invoice or expenses list. Indeed, an expense which includes VAT is a VAT-inclusive service or supply of goods. Standard-rated expenses 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; 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 your expense amounts after the reduction for UK VAT, as in the first point above. Once you’ve 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.
  • When your business recharges VAT, the next step is to add VAT at 20% to the second sub-total mentioned in the previous point above. To clarify, this is the actual VAT you charge on the total of the netted-down 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. This is the total amount you bill your client, which they can pay to your company’s business account when they settle this.

Conclusion on UK recharge invoice

When you follow the above billing process from start to finish, you’ll invoice your costs and expenses correctly. As a result, the VAT recharges on your company invoice regarding the expenses you charge will also be correct. You’ve billed your client’s expenses and VAT elements correctly. 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 that are VAT-registered themselves. Therefore, when you raise your invoice to them, they can claim back VAT, and if you charge this correctly, the VAT will be correct at their end, too.

Invoice examples (UK) 

How do the billable costs & 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 invoices, these will include rebilled expenses. On the other hand, you might be billing for your expenses on a separate invoice. What’s more, your UK contractor invoice may also include your supply of goods or services. To sum up, when ready to bill your client, please note 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 use 5/6ths as a simplified formula instead of 100/120ths. In short, the result is £100, which is the amount you’ll charge your client.
  • If your rail fare came to £50, you’ll bill £50 to your client. As we mentioned earlier, rail fares don’t include VAT, and, as a result, these are zero-rated. In short, the amount to invoice for this is £50.

Example contractor invoice showing recharging expenses

When you bill your expenses upon your invoice, you’ll produce a contractor expenses list of each cost you’re charging and each item’s cost. You must 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 a contractor recharge invoice billing your costs 

When you recharge your costs as a UK contractor, your actual contractor invoice may include your consulting fees and costs. In this example, the net amount on an invoice is the `charges’ column, and its key to note the total of your `charges’ is 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 to invoice for your expenses

On your recharged expenses invoice or client’s expenses form, you can set out the costs you invoice differently from the above. To sum up, when you’re a contractor company recharging costs, it’s key to note your invoice shows the VAT element, which is separate from 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 recharge invoice

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

  • You 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 incurred.
  • You charge VAT back on the costs, which 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 contracting in the UK. To sum up, the result is that 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 contractor website. Indeed, this explains the UK VAT system in more detail. Not only does this cover how VAT works for UK contractors, but it contains all the main aspects of VAT and is a handy read for most small business owners. Moreover, our guide covers many tips and advice around VAT when you run your own business.

What to do when you don’t follow the correct process for recharging expenses?

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

  • Be aware you didn’t do this right in the first place. As an aside, it would be best if you made a note HMRC could pick up on this later.
  • Second, please make sure you charge VAT on all your costs correctly in the future.

Final thoughts 

When you expense your costs as part of your recharge invoice, charging the VAT correctly is key. This is important so that when you’re paying the VAT to HMRC, it is correct. To sum up, when you do the `netting down’ process for each expense recharge, you’ll recharge VAT on any zero-rated costs that didn’t include VAT in the first place. Likewise, as part of the recharge process, you restore any `netted down’ standard-rated expenses to their original costs. To sum up, the process we describe here 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: April 6th, 2024 / Categories: First timer guide, Invoicing /

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5 Comments

  1. agitate March 29, 2023 at 4:45 am - Reply

    Everything is very open with a very cⅼear description of the
    issues. It was really informative. Your site іs useful.

    Thank ʏou for sharing!

  2. George Francis April 19, 2024 at 6:27 am - Reply

    HMRC guidance seems to suggest items like travel expenses we should charge VAT on even if the charge like train fares or flights did not originally include VAT. It makes a distinction between disbursements and recharges.

    “ You’ll have to charge VAT on them whether you paid any VAT or not.”

    This seems to contradict the example given above? Can you clarify please?

    https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers

    • contractoradviceuk April 19, 2024 at 11:43 am - Reply

      Hi George

      Expenses that include VAT are netted down, as explained in the article.

      All expenses (netted down where necessary) are added together to form a sub-total, and VAT is charged on that sub-total.

      Therefore, any expenses that do not include UK VAT, such as train fares or flights, do have VAT charged on them as part of the recharge to a client.

  3. George Francis April 19, 2024 at 6:36 am - Reply

    VAT is being added to the invoice example above for train the train travel?

    • contractoradviceuk April 19, 2024 at 11:44 am - Reply

      Hi again George.

      Yes, it is, as per our previous response.

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