My client is a self employed "girl Friday" who has incurred a number of expenses that she recharges to her clients.
The expenses include tickets to shows in London, postage, key cutting, beauty treatments and tickets to excursions. All theses expenses have been incurred on behalf of the client and charged onto them along with their hours on an invocie.
we are showing the re imbursed expenses as income, but what is the best way of showing these expenses on the tax return. Cost of sales? Some of the expenses are entertaining in nature, but she is not entertaining the client, but buying services on behalf of her clients and recharging them?
How do you classify these costs, and what records need to be kept?
Many thanks
Replies (19)
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Cost of sales
They are cost of sales, because these are goods and services she has sold to her customers.
They should only be coded to overheads when her business 'enjoyed' the use of them, not her client.
Keep the receipts as you normally would, and if the client needs to see them, provide them a photocopy. She needs to retain the originals as they are her receipts, not theirs.
If they are VAT registered and she is not, they can't claim back any VAT on those expenses.
No profit?
If these costs are recharged on a no profit/ no loss basis, then surely these are disbursements? They would then not appear in the accounts either as an income or an expense. If there is, or could be, an element of profit then I agree with the previous poster.
Disbursements
I was under the impression disbursements are primarily a VAT treatment.
I've never heard of disbursements not hitting the P&L, though am happy to be corrected if that's the right treatment. If you don't post those incomes and expenses to the P&L, where do you post them? A disbursements control account? I've always known them posted to cost of sales and income.
I'm with Monsoon on this one ....
If you don't show these costs in the accounts as both expenditure and income , how can you allocate the payment from the client?
Disbursements? Not P&L
Expenses of a true disbursement nature do not hit the P&L
They should be posted to the same nominal account as the income from them. It doesn't matter what account it is so long as it's the same account, though I would be inclined to post to a balance sheet account set up for the purpose so that any balance on it can be investigated.
-- Kind regards Andy
I'm afraid that I disagree
Disbursements are part of turnover. Deducting them in the trading account is correct.
If you exclude them then you are perhaps artificially depressing your turnover for VAT purposes in order to evade registration.
If already registered then you charge VAT on the disbursements.
@ Phil
In my experience you are precise and choose your words carefully, but are you sure you mean 'disbursements' as opposed to 'expenses'?
-- Kind regards Andy
@ Andy
I tend to use the terms more or less interchangeably. Some things are different in Wales.
Seriously, I am thinking in terms of an opted landlord recharging insurance to tenants and having to add VAT to the insurance costs, or an IT consultant recharging his travelling costs to the customer and adding VAT to train fares etc.
I come here to learn as well as to share my experience.
@ Phil
Thanks Phil
I come here to learn, too. I agree with your examples - they are turnover - but I would say they are expenses and not disbursements.
BTW - 'Man takes his case to quartz'. Awesome.
-- Kind regards Andy
Disbursements
I agree that Phil's example 'disbursements' are expenses and should be charged to VAT, and not true disbursements where you can pass them on without VAT.
Andy, do you have any reference for not including true disbursements in turnover? I have a company who have gone over the VAT threshold simply because of true disbursements and her 'actual' turnover without the disbursements is will below the VAT threshold. If there is something that can stop her registering for VAT I'm all ears!
Eureka!
The VAT threshold...
... isn't a threshold that applies to turnover, it applies to taxable supplies. If it's a genuine disbursement, then it isn't your supply, regardless of whether it's been incorrectly treated in the accounts.
Terry, you're a legend.
I agree, the Gril Friday is likely an employee but that's her client's lookout, not hers. Best practice to advise her that's the case though.
Two different issues
I think there are two different issues here. You said ".. do you have any reference for not including true disbursements in turnover?"
There's turnover as in true and fair for accounts purposes, and there's taxable turnover for VAT purposes.
As regards the second first of all, there's this from VAT Notice 700:
You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:
you acted as the agent of your client when you paid the third party;your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, telephone bills, postage, and other costs being treated as disbursements for VAT purposes);your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client);your client authorised you to make the payment on their behalf;your client knew that the goods or services you paid for would be provided by a third party;your outlay will be separately itemised when you invoice your client;you recover only the exact amount which you paid to the third party; andthe goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.
All these conditions must be satisfied before you can treat a payment as a disbursement for VAT purposes.
As regards the first, I would just refer you to the true and fair concept generally. Money going out of the business and coming back in is not necessarily turnover of that business.
Interesting
If a motor dealer outsources his MoT testing work and only charges his customer what it cost him, then that is not VATable.
If he adds a markup then the whole MoT fee is VAtable (not just the markup).
MoT's - aren't there 3 ways...
Phil,
In the MoT case, as I understand it the following is true:
Option 1 - dealer charges the same as cost - MoT is zero rated
Option 2 - dealer charges higher amount - MoT is fully vatable
Option 3 - Unlikely to ever be seen, but still an option - dealer can separate the charge for the MoT betwenn cost (zero rated ) and markup (standard rated) and hence only part of the dealers charge is vatable, saving the customer money, but also showing the profit element to the customer (which is why it is never seen in practice)
Entertaining
Perhaps the OP should inform his client that entertaining is disallowable for corporation tax (and VAT) in the books of the person incurring it. It would be difficult to treat such costs as disbursements on the basis that she is acting as an agent of the client, so they would have to be counted as income and the re-charges deducted as expenses on her tax return. The income will then be fully taxed but the expenses disallowed, so it may be a good idea for the Girl Friday to mark-up these items on her invoices so she does not end up bearing the tax on them. I'm pretty sure that's right but if anyone has a different view please let me know.
Chris
MoT 'S arent there 3 ways ?
I belive that option 1 should read exempt rather than zero rated ?
Interestingly,
this is a situation I have pondered over recently.
I have a client similar to the OP who runs a virtual office for busy executives and in some cases does all the purchasing and payments (and I do this myself occasionally).
In the past I have posted the payments to a COS account ”Purchases on behalf of clients” and included the charges in a sales account “Other sales”. At the end of a period the net effect on GP is nil, but they do appear on the P&L account.
Clearly at no point is there a benefit to my client and there is no mark up, the “benefit” is that time spent arranging this is included in her chargeable hours, so I do not consider them disallowable expenses and should be kept separate to the usual travel expenses, etc. which are charged in the usual way. This has not been questioned in the past, but perhaps because it has not been noticed.
I have been wondering if I should post these to a BS account “Disbursements” which would be nil at the end of a period if they are all recharged monthly, but would be included under Other Debtors if not recharged in the current period for some reason. From the earlier posts on this thread I think this might be the correct way but the drawback is there would be a balance to clear if a purchase was not recharged for some reason, whereas the COS account would clear at year end.
Is there a definitive answer?
Disbursement account
In response to Dave's post, I think a disbursement account in the BS is a very good idea. I do this for a PR agency client of mine who invoice a lot of re-charges and it helps to keep track of them. It's very easy to miss a re-charge as there are so many and it shows up straight away. It also helps to separate the re-chargeable expenses from the clients own overheads in the P&L. However, it does require a fair bit of extra work reconciling the account for timing differences, which the client may not be willing to pay for.
Chris