Recharging expenses
Expenses incurred in performing your duties for a client, such as
postage, travel, parking, and hotels, do not qualify as disbursements. They are
known as recharges. They typically arise when the client has agreed to pay a
fee for the service plus certain costs. Recharges can include any incidental
expenses but are often connected to travel.
You may separate these recharged costs in your sales invoices for your
client, but they must all be subject to VAT – even if the original expense did
not. For VAT-registered customers, this is unlikely to be an issue as they will
reclaim the VAT from HMRC. If you do not want a cost marked up by VAT, you
should get the customer to pay for it themselves or agree to a flat fee for
your service that includes any incidental charges of the service.
Disbursements
Typically disbursements are, by comparison to recharges, relatively rare
in business. The difference is subtle but easily determined by asking who is
legally liable. The most common example is the legal profession, where a
solicitor will pay stamp duty and other legal charges for the client. These are
not costs of the solicitors' time, nor is the solicitor obligated to pay these
expenses. The stamp duty has nothing to do with the solicitor and is a cost to
the client, so it is a disbursement.
You can't claim back any VAT on the items which are a disbursement as
they are treated as supplied to your customer and not to your business. Where
possible, have the receipt in the client's company name. This safeguards the
expense from becoming attached to your company. When recharging the client for
a disbursement, you do not charge output VAT on the amount. The disbursements
are listed separately on the invoice, and you recharge precisely the cost.
An example of a recharge
You paid a hotel bill of £1,200 gross, including £200 of input VAT. Your
contractual terms and conditions enable you to recharge expenses to your
client. You can recharge this expense incurred net of VAT or the gross cost.
First Option – you recharge the expense net of VAT.
£1,000 plus 20% VAT = £1,200.
Second Option – your recharge the Gross Expense with the agreement of
your customer:
£1,200 plus 20% VAT = £1,440. If you are on the flat rate scheme, you
will want to do this if you cannot reclaim VAT on your expenses.
Both ways are correct under the VAT Act as long as the total amount of
recharged expenses are included in the VAT calculation when invoiced to the
customer.
An example of a disbursement
A solicitor charges £5,000+vat for their conveyancing services and has
paid £50,000 in stamp duty. The client is given a bill for:
Services £5,000
VAT: £1,000
Subtotal £6,000
Disbursement: £50,000
Due from client: £56,000
For further information on recharges and disbursements, please see HMRC
guidance here.