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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My consultancy accounts to clients comprise fees and recoverable

Resolved Question:

My consultancy accounts to clients comprise fees and recoverable out of pocket expenses.
Should I include the VAT input tax in the expenses and then add my VAT output tax across both the fees and these (gross) expenses?
Martin Davis
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you give me some examples of out of pocket expenses please.
Customer: replied 2 years ago.

HI:

Parking and refreshments/working lunch expenses both come with VAT input tax; train fares of course don't. EG:

Fees £1,000

Expenses with their input tax £200 (net of it may be £180)

Subtotal £1,200

Add VAT output tax @20% 240

Bill to Client £1,440?

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 2 years ago.

Hi again.

I know you've already looked here but it is helpful though there could be more examples.

A disbursement is usually an expense that you have incurred on the client's behalf and that it would normally be the client's responsibility to pay. For instance, I may pay a Companies House filing fee on behalf of a client because it is convenient. The charge is the client's responsibility ultimately, not mine. When I recharge a cost cost that would normally be the client's responsibility to the client, I don't charge VAT and I cannot reclaim the VAT back so the recharge will include the VAT I may have paid. For the client to reclaim the VAT, they will need a VAT invoice which may not always be available.

As for the types of costs you mentioned in your post, these are not incurred on behalf of the client and are therefore not disbursements. You incurred them on your own behalf. If you are VAT registered and you recharge them to your client, you will have to charge VAT whether you paid any VAT on those costs or not. If you are VAT registered you will be able to claim back the VAT you paid and that means you will probably only recharge the net of VAT cost to your client. If you aren't VAT registered, you will probably recharge the inclusive of VAT charge to cover your costs.

I do know of people who effectively hike such recharged expenses even if they can get the VAT back. They call the excess a service charge.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Hi:

Thanks for your reply, but it is extraordinary if there isn't an established rule on something that must arise millions of times a day. Your penultimate paragraph almost suggests leaving the input tax in the expenses is sharp practice.

Obviously if the client is able to recover our VAT output tax (as his input tax) he is not disadvantaged. If he cannot, he might raise questions.

If you have no more authoritative support for "the right way", let us leave your answer as it stands. But it doesn't really help me. Sorry!

Expert:  TonyTax replied 2 years ago.
I didn't make any judgement about leaving the VAT in. I simply said what I know some people.do. It's a fact that some second hand booksellers on amazon make their money from charging more for postage than they pay to post a book than they do from the book itself. I buy from those sellers so I don't have a problem with it.

As far as I'm aware there is no established rule other than the guidelines on the page you and I referred to. I have pointed many clients at that and none that I know of have had a problem with it.

I don't mind if you don't want to pay for my answer but if that's the case, I' be grateful if you would not rate it at all as I find it hard to take a negative rating for a technically correct answer.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15847
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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