Recharging expenses

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Introduction

When you are a limited company contractor in the UK, it could be the case that you need to be aware of the process of recharging expenses. This may arise as part of your work if you begin to incur costs on behalf of the client. On the other hand, you may need to recharge expenses from the outset when you start your new business. Therefore how, do you create a recharge invoice?

As a UK contractor, and during part of your contract work, you may incur various rechargeable costs and will therefore 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:

  • The expenses you incur while carrying out your work, such as travelling expenses.
  • The cost of any goods -you may acquire some goods on behalf of your client, such as equipment.

With regards to whether you will be recharging expenses, this will depend on both your client and the industry you work within. In today’s world, many contractors will incur travelling costs when they go to their work locations and as a result, they will be charging travel expenses to clients on a recharge invoice. Other contractors or consultants may also incur goods costs directly on their client’s behalf. In both instances, it could be your responsibility to pay for the goods or services on your customer’s behalf.

Initial thoughts

Please note, if it is the case that you will incur the cost of expenses or goods as part of your work, it follows that you should then be allowed to recharge the cost to your client. Indeed, when you can do this there is a specific process for you to follow.

When you raise an invoice for your work as a limited company contractor, what is the correct process to follow when it comes to charging expenses back to your client? Furthermore, how do you show the recharge of expenses cost correctly on your invoice? Please note that the correct way to show your recharged costs is a common misunderstanding among many contractors and small business owners.

As mentioned, it is not necessarily easy to discover or find out how to show the recharge of costs correctly. In most cases, many clients will also not be clear about how you should recharge costs. In fact, most will expect that you know how to do this yourself. Therefore, you can research this on the internet yourself through HM Revenue & Customs (HMRC) and other websites. However, most contractors or small business owners will find that the process explaining how to do this is not very easy to locate. This article aims to explain clearly what you need to do when recharging costs and expenses.

Further initial thoughts

Any goods or services you pay for, which are a cost to your customer, will need to be shown on your invoice to your client. When you do this, you can show these costs separately on your invoice or on an expenses recharged list attached to your invoice. To clarify, you will need to make it clear on your invoice or expenses recharged list which elements are for:

  • Your main consultancy fees/hours of work.
  • Any expense that you recharge.

As a side note, you could do this in your home office when you create invoices to send to your client. In addition, when you create invoices for your clients, you could use an online accounting platform. Please note that many of the online systems now available will help you to create your invoices.

Do you charge VAT when you are recharging expenses? 

VAT legislation

Can you charge VAT on travel expenses, or should you charge VAT? What about other types of costs that you recharge. Therefore, do you charge VAT on recharged expenses?

Under VAT legislation, you must show the rechargeable expenses separately on your invoice when you are charging expenses back to your client.

When you make recharges to your client, the costs that you will have incurred on their behalf will more than likely include travel expenses. In addition, your expenses may also include some incidental costs too. Consequently, when you recharge your expenditures, you must follow the correct recharging process.

Rechargeable expenses -expenses that include and do not include VAT

An important consideration is that most expenses include VAT however some do not. Therefore, when an expense includes VAT the two following factors will apply:

  • First, the expense will be VAT-inclusive, i.e., standard rated. Notably, most costs include VAT, but some do not. Please note the expenses which do not include VAT are rail fares, tube fares, flights, and others.
  • Next, the supplier will be VAT registered. Please note that 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 will not be.

VAT inclusive costs

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

On the other hand, if you had a rail fare of £50.00, the amount you need to list on your expenses will be £50.00. Notably, this is because there is no VAT on rail fares. Therefore, there is no VAT to deduct from this.

Formula to use

There is a formula to use when you work out the VAT when charging travel expenses to clients. This formula applies to all types of expenses and costs recharged. To explain further here, you will recharge your expenses as part of your total invoice to your client. Therefore, the formula to use is as follows:

  • First, please reduce standard-rated expenses to the pre-VAT amount in the VAT calculations. In addition, please note that an expense which includes VAT will be a VAT-inclusive service or supply of goods. Furthermore, standard-rated expenses include travel costs such as hotel bills, parking fees and meals out. However, certain expenses like flights and rail fares do not include VAT; therefore, these are zero-rated expenses. When a business is VAT registered, the invoice/receipt from the supplier will contain a VAT number.
  • Second, please add up all your expenses. Once you have done this, you will arrive at a sub-total of costs.
  • Next, add the expenses sub-total to the consultancy 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. Please note that this is the actual VAT on the recharged expenses.
  • Finally, you will arrive at the total. Please note that this is the total amount that is billable to the customer.

VAT guide

We have a separate VAT guide on this website. This explains the VAT system in more detail, and it covers how VAT works for UK contractors.

The guide contains all the main aspects about VAT and is, therefore, a handy guide for most small business owners. Moreover, this covers many tips and advice around VAT when you run your own business.

An example of recharged expenses and the VAT on recharged expenses

When you are ready to recharge expenses, what is a recharge invoice and how does it look? Notably, when you create your recharge invoices, these will include your expenses recharged. You might be billing for your expenses recharged separately; however, it may also incorporate your supply of goods or services. Therefore, when you are ready bill your client, please note the following as part of charging VAT on expenses:

  • If your hotel bill comes to £120 and this includes standard-rated VAT at 20%, you will need to net this down to 100/120ths. Therefore, you can multiply £120 x 100/120. You can alternatively use 5/6ths as a simplified formula instead of 100/120ths. Please note that the result is £100, which is the amount you would charge your client.
  • If your rail fare came to £50, you will charge £50. As mentioned earlier, rail fares do not include VAT and are therefore zero-rated.

An actual example of recharging expenses incurred

When you are recharging costs and charging VAT on expenses, your actual invoice may include both your consultancy fees and your expenses. For example, your invoice could look like this:

Expense cost VAT element 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 recharge 166.67

An actual example of what your invoice could look like when you have recharged expenses

When you are recharging costs and charging VAT on expenses, your actual invoice may include both your consultancy fees and your expenses. For example, your invoice could look like this:

Charges
Consultancy fees 3,000.00
Gross VAT Charge
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 billable to the client 3,800.00

A further example of how recharged expenses may look

Please note, on your invoice or your client’s expenses form, you can set out the costs you recharge differently from the above. In this next example, it shows the VAT element that is separately applicable to both your fees and expenses:

Invoice
Charges VAT at 20% Total
Consultancy fees 3,000.00 600.00 3,600.00
Gross VAT Charge
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 billable to the client 3,166.67 633.33 3,800.00

Summary

Most importantly, when you are recharging expenses, you will do the `netting down’ exercise for any goods and services you paid. This will ensure that the VAT on expenses recharged is correct such that you charge VAT on expenses that did not originally include VAT and you effectively charge the VAT on the expenses that did originally include VAT.

If you do not follow this process when charging expenses back to your client, you will, in effect, charge the VAT element to them twice. As a result, this will in effect cost your client more. In this case, you will need to consider contacting your customer/client to try and sort this out. Alternatively, 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.
  • Secondly, make sure you charge VAT on expenses correctly going forward.

Final thoughts  

When you recharge your expenses, it is essential to account for VAT on expenses correctly. Therefore, when you do the `netting down’ process, you are effectively charging VAT on any zero-rated expenses that did not include VAT in the first place. During this process you also restore any `netted down’ standard-rated expenses to their original costs. Finally, it is important to note we describe here the correct method when you recharge expenses to your customer or client.

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Published On: August 1st, 2022 / Categories: First timer guide, Invoicing /

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