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VAT on expenses recharged to client

Incorrect treatment of VAT on expenses recharged to client

I have a new client who operates through a Limited Company charging her clients fees for her consultancy services and some of her expenses (mainly hotel bills) are re-imbursed to her by her main client. Lets say we are looking at hotel bills over the 3 years since she set the company up of £9,000 (being £7,500 + VAT = £9,000).

She has invoiced these expenses on to her client at £7,500 + VAT (because that is what her client advised her she should do).

Now my client has been advised by her client that this is in fact the wrong way to do it and that she should actually be invoicing the recharged expenses for the gross expense of £9,000 + VAT.

My understanding that this is indeed the correct way to do expense recharges. Take the gross expense and charge VAT on this.

My client's client have said the easiest option is to ignore the past but start doing it correctly from now.

I suppose technically my client should correct all the previous invoices to include the correct amount of VAT or perhaps easier to just raise a "VAT only" invoice for £300 (9,000 less 7,500 x 20%). 

However as the amounts involved are small and as her client will reclaim the extra £300 VAT back from HMRC anyway in this case is it really worth doing it?

Whats the worst that could happen in this situation?

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14th Mar 2019 18:15

So what she's done is recharge her expenses.

And what is proposed is she makes a £1,500 profit on her expenses.

Is you client's client stupid?

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By Matrix
14th Mar 2019 19:35

She should charge the amount agreed in the contract with her client. If this is actual bills+VAT and this is £7,500+VAT then she has done it correctly. You should just be concerned that the input and output VAT are correct, the terms are a commercial issue.

I have never heard of someone asking for their bill to be increased though.

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15th Mar 2019 09:23

Your client can charge what she likes, so long as her client will pay it. She can overcharge or undercharge, put a 50% markup on it or charge them her bill plus VAT, it doesn't matter at all so long as her client pays it.

The only important bit is that whatever she charges them she adds 20% VAT on to it and shows that on her invoice.

e: given that she's done that in the past, there's nothing to correct, it just sounds as though she's missed out on extra income. If the client is amenable then she might as well bill them for it now though.

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15th Mar 2019 09:26

"My understanding that this is indeed the correct way to do expense recharges. Take the gross expense and charge VAT on this."

I disagree with this, on the assumption that there is no intention to profit from expenses.

The client should charge the gross expense, less any VAT she can recover, plus VAT.

For an hotel bill, this is likely to be the gross amount she paid in the first place. But for a rail fare, it'll be 20% more.

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